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Abstract:
In this essay, I attempt to take seriously Schumpeter?s perspective on competition as fundamentally about innovation. Drawing on literatures that concern themselves centrally with the patterns and processes of technological change, I focus on a set of issues very much on the present-day agenda: antitrust policy toward network industries in which technological standards are important. As both scholars and legal cases have suggested, one might logically view a set of standards as an ?essential facility? ? a technological bottleneck ? for those who wish to connect to the network.

I attempt to define the limits of the standard price-theoretic account for understanding the problem of essential facilities and offer instead a perspective drawing on the theory property rights in a regime of innovation. Contrary to what is suggested by traditional economic analysis, I argue that, as a logical matter, refusals to deal by essential-facility monopolists are not always equivalent to the exercise of existing monopoly power through price, and there are good theoretical reasons for an essential facility doctrine to concern itself with refusals to deal even when it fails to touch other exercises of market power by a legally acquired monopoly. I introduce the concept of the scope of an essential facility, understood in analogy with a similar concept in the economics of patents, and suggest that the degree to which antitrust policy should concern itself with the ownership or control of a technical standard ought to be proportional to the scope of the standard.

At the same time, however, a Schumpeterian perspective reminds us that, in a world of dynamic technological competition, even possession of a standard with wide scope may afford only temporary protection, and the winds of Schumpeterian creative destruction may be a better antidote to monopoly than the cumbersome and interest-laden processes of antitrust law and policy. Nonetheless, the notion of the scope of a standard may prove useful in many cases, including those involving regulated (or formerly regulated) industries or involving tradeoffs in intellectual property rights.

Abstract:
In The Visible Hand (1977) and subsequent works, Alfred Chandler chronicled the rise of the large vertically integrated corporation in the late nineteenth and early twentieth centuries. On one reading, The Visible Hand is about the response of business institutions to the conditions of a particular historical episode, namely the dramatic increases in population and per capita income in the United States after the Civil War, coupled with the equally dramatic fall in transportation and transaction costs attendant on the railroad, the inland water network, and the telegraph. On another reading, however, the managerial revolution represents the emergence of an institutional structure inherently superior for all times and places to that of decentralized ownership and market exchange in all its forms. History is never kind to historicists, however; and the facts of the last quarter century have made life uncomfortable for those who would project the Chandlerian model into the present. It has become exceedingly clear that the late twentieth (and now early twenty-first) centuries are witnessing a revolution at least as important as, but quite different from, the one Chandler described. Strikingly, the animating principle of this new revolution is precisely an unmaking of Chandler's revolution. Rather than seeing the continued dominance of multi-unit firms in which managerial control spans a large number of vertical stages, we are seeing a dramatic increase in vertical specialization - a thoroughgoing "de-verticalization." In this respect, the visible hand - understood as managerial coordination of multiple stages of production within a corporate framework - is fading into a ghostly translucence. We are left with the choice of abandoning Chandler or reinterpreting him. This essay takes the latter course. If we take the first reading of The Visible Hand - that the managerial revolution was an adaptation to particular historical circumstances - then we can explain the organizational revolution of the new economy by embedding Chandler's story within a roomier account that admits of a range of possible historical circumstances. As a byproduct, such a reinterpretation can hope not only to explain the new economy but also to shed light on the organizational changes of the original Chandlerian revolution. The basic argument - the vanishing-hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets. But the components of that process - technology, organization, and institutions - change at different rates. The managerial revolution Chandler chronicles was the result of such an imbalance, in this case between the coordination needs of high-throughput technologies and the abilities of contemporary markets and contemporary institutions to meet those needs. It was an organizational solution appropriate to its time and place. But with further growth in the extent of the market and the evolution of institutions to support exchange, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization.

Abstract:
In a series of classic works, most notably The Visible Hand (1977) and Scale and Scope (1990), Alfred Chandler focused the spotlight on the large, vertically integrated corporation, which emerged in the late nineteenth century to replace what had been a fragmented and localized structure of production and distribution. In Chandler's account, the driving force behind the transformation was increased population and higher per-capita income, combined with lowered transportation and communications costs made possible by the spread of the railroad and telegraph. Adam Smith had predicted an increasingly fine division of labor as the response to a growing extent of the market; and, although he was actually quite vague on the organizational consequences of the division of labor, Smith was clear in his insistence on the power of the invisible hand of markets to coordinate economic activity. Chandler's account challenges this prediction: internal or managerial coordination became necessary to coordinate the "new economy" of the late nineteenth and early twentieth centuries, and the visible hand of managerial coordination replaced the invisible hand of the market.

Many would argue that the late twentieth (and now early twenty-first) centuries are witnessing a revolution at least as important as the one Chandler described. Population and income are again a driving force, but the railroad and telegraph have been replaced by the computer, telecommunications technology, and the Internet. In this epoch, Smithian forces may be outpacing Chandlerian ones. Management retains important functions, of course, including some of the same ones Chandler described. But as the central mechanism for coordinating high-throughput production, the visible hand - many would argue - is fading into a ghostly translucence.

This paper is a preliminary attempt to explain why this is so - to provide some theoretical insight into the organizational structure of the new economy. The basic argument "the vanishing-hand hypothesis" is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets. But the components of that process - technology, organization, and institutions - change at different rates. The managerial revolution Chandler chronicles was the result of such an imbalance, in this case between the coordination needs of high-throughput technologies and the abilities of contemporary markets and contemporary technologies of coordination to meet those needs. With further growth in the extent of the market and improvements in the technology of coordination, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization.

New Economy, Mangerial Revolution, vertical integration, Internet, transaction costs, flexible specialization, subcontracting, division of labor, outsourcing

Abstract:
Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces--which can then communicate with one another only through standardized interfaces within a standardized architecture--one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. Such ideas are not new in the literature of technological design, even if, as some claim, modularity is becoming more important today because of the increased complexity of modern technology. What is new is the application of the idea of modularity not only to technological design but also to organizational design.

From another angle, however, the principles of modularity have an even longer pedigree in the social sciences. We can think of Adam Smith's "obvious and simple system of natural liberty" as among the earliest proposals for how a complex modern society might be made more productive through a modular design of social and economic institutions. In separating mine from thine, rights of private property modularize social interaction, which is then mediated through the interface of voluntary exchange, all under the governance of the systems architecture of common law. Despite its heavy emphasis on incentive issues, the economics of property rights that emerged from the work of Coase--in both its original form and its more formal recent incarnation--provides a good deal of material useful for understanding the nature and role of modularity in social institutions.

This paper is an attempt to raid both the literature on modular design and the literature on property rights to create the outlines of a modularity theory of the firm. This theory will look at firms, and other organizations, in terms of the partitioning of rights--understood as protected spheres of authority--among cooperating parties. And it will assert that organizations reflect nonmodular structures, that is, structures in which decision rights, rights of alienation, and residual claims to income do not all reside in the same hands. The reasons behind alternative partitions are numerous and complex, however, calling for subtlety in the application of the idea of modularity to the firm.

Abstract:
In the last 25 years, the economics of organization has emerged as a thriving branch of economics. In spite of some variety among the contributions to this field, it is fair to say that the literature is in agreement on the fundamentals. The basic insight is this: in addition to production costs of the usual sort, one must also consider transaction costs in explaining institutions like the firm. Whether called transaction-cost economics (Williamson 1975, 1985) or the economics of organization more broadly (Milgrom and Roberts 1992), the field has indeed focused precisely on the comparative transaction costs of alternative organizational structures, including, paradigmatically, the choice between firms and markets. Firms and other institutions are alternative bundles of contracts, understood as efficient mechanisms for creating and realigning incentives. Transacting is fraught with hazards, and the problem of organization is one of creating governance structures to constrain the unproductive rent-seeking behavior that imperfect information permits. In fact, the basic heuristic driving this literature is to reduce literally all problems of economic organization to problems of incentive-conflicts attendant on imperfect information.

Abstract:
We argue that since Coase?s seminal 1937 paper on "The Nature of the Firm," there has been an odd and unjustified separation between price theory and the economics of organization. For example, matters of production has been the domain of the former exclusively. However, a new approach to economic organization, here called "the capabilities approach," that places production center-stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization.

Abstract:
The English-language literature of technological change is one of the few areas of economic writing in which Joseph Schumpeter has maintained a following and in which he has been accorded some modicum of the attention he deserves. There has grown up within this literature a standard interpretation of Schumpeter's famous assertion that progress will eventually come to be "mechanized." The conventional wisdom goes something like this. The argument in Schumpeter's early writings - by which writers invariably mean the 1934 English translation of The Theory of Economic Development - is really quite different from that in Capitalism, Socialism, and Democracy. There are, in effect, two Schumpeters: an "early" Schumpeter and a "later" Schumpeter. It was the former who believed in the importance of bold entrepreneurs, while the latter envisaged their demise and replacement by a bureaucratized mode of economic organization. Moreover, the reason Schumpeter changed his views is that he was reacting to the historical development of capitalism as he saw it taking place around him. As he moved from the world of owner-managed firms in early twentieth-century Europe to the world of large American corporations in the 1930s and 1940s, his opinions changed appropriately.

The paper attempts to make two points. The first is that, as a doctrinal matter, the "two Schumpeters" thesis, as it is understood in the Anglo-American literature on technological change, is clearly wrong. Equally wrong is the idea that the fundamentals of Schumpeter's thought on entrepreneurship were influenced importantly by any observation of large firms in the United States after 1931. Schumpeter's ideas were remarkably consistent from at least 1926 (five years before he came to the U. S.) until his death. The obsolescence thesis speaks to a distinction between early capitalism and later capitalism, perhaps, but not to an earlier and later Schumpeter. The second, and more important, point is that the obsolescence thesis is wrong. It rests on a confusion - or perhaps a bait-and-switch - between two quite different kinds of economic knowledge.

Schumpeter, entrepreneur, capitalism, innovation

Abstract:
The English-language literature of technological change is one of the few areas of economic writing in which Joseph Schumpeter has maintained a following and in which he has been accorded some modicum of the attention he deserves. There has grown up within this literature a standard interpretation of Schumpeter's famous assertion that progress will eventually come to be "mechanized." The conventional wisdom goes something like this. The argument in Schumpeter's early writings - by which writers invariably mean the 1934 English translation of The Theory of Economic Development - is really quite different from that in Capitalism, Socialism, and Democracy. There are, in effect, two Schumpeters: an "early" Schumpeter and a "later" Schumpeter. It was the former who believed in the importance of bold entrepreneurs, while the latter envisaged their demise and replacement by a bureaucratized mode of economic organization. Moreover, the reason Schumpeter changed his views is that he was reacting to the historical development of capitalism as he saw it taking place around him. As he moved from the world of owner-managed firms in early twentieth-century Europe to the world of large American corporations in the 1930s and 1940s, his opinions changed appropriately.

The paper attempts to make two points. The first is that, as a doctrinal matter, the "two Schumpeters" thesis, as it is understood in the Anglo-American literature on technological change, is clearly wrong. Equally wrong is the idea that the fundamentals of Schumpeter's thought on entrepreneurship were influenced importantly by any observation of large firms in the United States after 1931. Schumpeter's ideas were remarkably consistent from at least 1926 (five years before he came to the U. S.) until his death. The obsolescence thesis speaks to a distinction between early capitalism and later capitalism, perhaps, but not to an earlier and later Schumpeter. The second, and more important, point is that the obsolescence thesis is wrong. It rests on a confusion - or perhaps a bait-and-switch - between two quite different kinds of economic knowledge.

Schumpeter, entrepreneur, capitalism, innovation

Abstract:
This essay is a reinterpretation of the debate over the origins of the factory system. In the end, it argues, the explanation for the rise of the factory system lies in the realm of organization, but not in the qualities of organization envisaged by either the "radical" view or the transaction-cost view. Drawing on the recent explanations of Clark and Lazonick, the paper suggests that the explanation lies in the volume effect rather than the division-of-labor effect of increasing extent of the market. The essay closes with some musings on the logic of both efficiency and exploitation in historical explanation.

Abstract:
This essay is a reinterpretation of the debate over the origins of the factory system. In the end, it argues, the explanation for the rise of the factory system lies in the realm of organization, but not in the qualities of organization envisaged by either the "radical" view or the transaction-cost view. Drawing on the recent explanations of Clark and Lazonick, the paper suggests that the explanation lies in the volume effect rather than the division-of-labor effect of increasing extent of the market. The essay closes with some musings on the logic of both efficiency and exploitation in historical explanation.

Abstract:
The entrepreneurial theory of the firm argues that entrepreneurship, properly understood, is a crucial but neglected element in explaining the nature and boundaries of the firm. By contrast, the theory of the entrepreneurial firm presumably seeks not to understand the nature and boundaries of the firm in general but rather to understand a particular type of firm: one that is entrepreneurial. This paper is an attempt to reconcile the two. After briefly delving for the concept of entrepreneurship in the work of Schumpeter, Kirzner, and (especially) Knight, the paper makes the case for the entrepreneurial theory of the firm. In such a theory, the firm exists as the solution to a coordination problem in a world of change and uncertainty, including Knightian or structural uncertainty.

Abstract:
The entrepreneurial theory of the firm argues that entrepreneurship, properly understood, is a crucial but neglected element in explaining the nature and boundaries of the firm. By contrast, the theory of the entrepreneurial firm presumably seeks not to understand the nature and boundaries of the firm in general but rather to understand a particular type of firm: one that is entrepreneurial. This paper is an attempt to reconcile the two. After briefly delving for the concept of entrepreneurship in the work of Schumpeter, Kirzner, and (especially) Knight, the paper makes the case for the entrepreneurial theory of the firm. In such a theory, the firm exists as the solution to a coordination problem in a world of change and uncertainty, including Knightian or structural uncertainty. Taking a historical or developmental perspective, the paper then examines the changing nature of the entrepreneurial coordination problem over the life-cycle. In this formulation, the entrepreneurial firm is a nascent firm or proto-firm facing a problem of coordinating systemic change in economic capabilities. Lacking (by definition) adequate guidance from existing systems of rules of conduct embedded in markets or organizations, the entrepreneurial firm typically relies on a form of organization Max Weber called charismatic authority. In the end, although there is no such thing as a non-entrepreneurial firm, firms that must solve coordination problems in a world of novelty and systemic change ("entrepreneurial firms") are perhaps the purest case of the entrepreneurial theory of the firm.

entrepreneurship, transaction costs, coordination, Coase, Knight, Schumpeter, Weber

Abstract:
The transistor was an American invention, and American firms led the world in semiconductor production and innovation for the first three decades of that industry's existence. In the 1980s, however, Japanese producers began to challenge American dominance. Shrill cries arose from the literature of public policy, warning that the American semiconductor industry would soon share the fate of the lamented American consumer electronics business. Few dissented from the implications: the only hope for salvation would be to adopt Japanese-style public policies and imitate the kinds of capabilities Japanese firms possessed.

But the predicted extinction never occurred. Instead, American firms surged back during the 1990s, and it now seems the Japanese who are embattled. This remarkable American turnaround has gone largely unremarked upon in the public policy literature. And even scholarship in strategic management, which thrives on stories of success instead of stories of failure, has been comparatively silent.

Drawing on a more thorough economic history of the worldwide semiconductor industry (Langlois and Steinmueller 1999), this essay attempts to collect some of the lessons for strategy research of the American resurgence. We argue that, although some of the American response did consist in changing or augmenting capabilities, most of the renewed American success is in fact the result not of imitating superior Japanese capabilities but rather of taking good advantage of a set of capabilities developed in the heyday of American dominance. Serendipity played at least as important a role as did strategy.

Abstract:
In a marvelous but somewhat neglected paper, "The Corporation: Will It Be Managed by Machines?" Herbert Simon articulated from the perspective of 1960 his vision of what we now call the New Economy - the machine-aided system of production and management of the late twentieth century. Simon's analysis sprang from what I term the principle of cognitive comparative advantage: One has to understand the quite different cognitive structures of humans and machines (including computers) in order to explain and predict the tasks to which each will be most suited. Perhaps unlike Simon's better-known predictions about progress in artificial intelligence research, the predictions of this 1960 article hold up remarkably well and continue to offer important insights.

In what follows I attempt to tell a coherent story about the evolution of machines and the division of labor between humans and machines. Although inspired by Simon's 1960 paper, I weave many other strands into the tapestry, from classical discussions of the division of labor to present-day evolutionary psychology. The basic conclusion is that, with growth in the extent of the market, we should see humans "crowded into" tasks that call for the kinds of cognition for which humans have been equipped by biological evolution. These human cognitive abilities range from the exercise of judgment in situations of ambiguity and surprise to more mundane abilities in spatio-temporal perception and locomotion. Conversely, we should see machines "crowded into" tasks with a well-defined structure. This conclusion is not based (merely) on a claim that machines, including computers, are specialized idiots-savants today because of the limits (whether temporary or permanent) of artificial intelligence; rather, it rests on a claim that, for what are broadly "economic" reasons, it will continue to make economic sense to create machines that are idiots-savants.

New Economy, cognition, division of labor, artificial intelligence, work organization, skill

Abstract:
In a marvelous but somewhat neglected paper, "The Corporation: Will It Be Managed by Machines?" Herbert Simon articulated from the perspective of 1960 his vision of what we now call the New Economy - the machine-aided system of production and management of the late twentieth century. Simon's analysis sprang from what I term the principle of cognitive comparative advantage: one has to understand the quite different cognitive structures of humans and machines (including computers) in order to explain and predict the tasks to which each will be most suited. Perhaps unlike Simon's better-known predictions about progress in artificial intelligence research, the predictions of this 1960 article hold up remarkably well and continue to offer important insights.

In what follows I attempt to tell a coherent story about the evolution of machines and the division of labor between humans and machines. Although inspired by Simon's 1960 paper, I weave many other strands into the tapestry, from classical discussions of the division of labor to present-day evolutionary psychology. The basic conclusion is that, with growth in the extent of the market, we should see humans "crowded into" tasks that call for the kinds of cognition for which humans have been equipped by biological evolution. These human cognitive abilities range from the exercise of judgment in situations of ambiguity and surprise to more mundane abilities in spatio-temporal perception and locomotion. Conversely, we should see machines "crowded into" tasks with a well-defined structure. This conclusion is not based (merely) on a claim that machines, including computers, are specialized idiots-savants today because of the limits (whether temporary or permanent) of artificial intelligence; rather, it rests on a claim that, for what are broadly "economic" reasons, it will continue to make economic sense to create machines that are idiots-savants.

New Economy, cognition, division of labor, arificial intelligence, work organization, skill

Abstract:
In neoclassical theory, knowledge generates increasing returns-and therefore growth-because it is a public good that can be costlessly reused once created. In fact, however, much knowledge in the economy is actually tacit and not easily transmitted-and thus not an obvious source of increasing returns. Several writers have responded to this alarming circumstances by affirming hopefully that knowledge today is increasingly codified, general, and abstract-and increasingly less tacit. This paper disputes such a trend. But all is not lost: for knowledge does not have to be codified to be reused and therefore to generate economic growth.

Tacit knowledge, Increasing returns, Growth theory, Knowledge reuse, Codification

Abstract:
Formal theories of economic growth, including newly popular models of "endogenous" growth, rely on a conception of knowledge as explicit and costlessly transferable. Once created, knowledge can spill easily into the hands of others at zero marginal cost, a process of "spillover" that is the source of the increasing returns that generate economic growth. While not questioning some essential truth to this story, students of the process of technological change -- especially those who have not restricted themselves to theoretical models -- have expressed considerable doubt about the this picture of technological knowledge and its creation. Much technological knowledge cannot in fact be transmitted easily to others; much technological knowledge is inarticulate and tacit, and can be transmitted only at a cost through imitation and apprenticeship. To the extent that knowledge is tacit in this way, it behaves like an ordinary private good, and its role in generating increasing returns is lost.

One response to the problem of tacit knowledge among sophisticated students of innovation has been to create a clear distinction between knowledge that is tacit and knowledge that is codified. Under this stratagem, the large place of tacit knowledge in social learning does not invalidate growth theory so long as there also exists codified knowledge in suitable quantities. Some writers would even go further, suggesting that technological change and economic growth have had the effect of tipping the balance between tacit and codified knowledge. "More" knowledge is becoming codified, implying (and perhaps explaining) an accelerated pace of social learning and economic growth.

This essay takes a skeptical view of the proposition that we are experiencing greater codification hand in hand with modern technology and economic growth. But such skepticism need not have dire implications for (the theory of) economic growth. The essay takes an equally skeptical view of the proposition that only codified knowledge, and never tacit knowledge, can generate economic growth. Knowledge can be externalized and made less idiosyncratic in ways that do not necessarily involve codification. Knowledge is structure. And knowledge can be externalized beyond an individual creator by being imbedded either in machines and other physical technology or in various kinds of social or behavioral structures that I will broadly call institutions. Using a wonderful 1912 essay by Wesley Clair Mitchell as a starting point, I examine, as a kind of case study, the way in which knowledge is embedded and shared in consumption -- an important and neglected aspect of the process of economic growth.

Abstract:
In 1977, when Alfred Chandler's path-breaking book The Visible Hand appeared, the large vertically integrated "Chandlerian" corporation had dominated the organizational landscape for nearly a century. In some interpretations, possibly including Chandler's own, The Visible Hand and subsequent works constitute a triumphalist account of the rise of that organizational form: the large vertically integrated firm arose and prospered because of its inherent superiority, in all times and places, to more-decentralized market-oriented production arrangements. A quarter century later, however, the Chandlerian firm no longer dominates the landscape. It is under siege from a panoply of decentralized and market-like forms that often resemble some of the "inferior" nineteenth-century structures the managerial enterprise had replaced.

What to do with a triumphalist history of something no longer triumphant? The menu of intellectual alternatives is short. One could reject Chandler's account as having been wrong from the start. One could deny that the large corporation is less successful and superior today than it was in the past. Or, most interestingly, one could attempt to reinterpret Chandler in a way that preserves the essence of his contribution while placing that contribution in a frame large enough to accommodate both the rise and the (relative) fall of the large managerial enterprise. This last alternative - if done right - has the great advantage of preserving the essence of Chandler's remarkable and profound insights while at the same time extending our understanding of the economic theory of organization.

In April, 2003, there appeared in print two long essays attempting this third approach. One is the work of the formidable trio of Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin (henceforth LRT); the other is my own paper called "The Vanishing Hand." I devote the first part of this essay to comparing my account with that of LRT. There is much common purpose and a good deal of overlapping explanation in the two papers; and I will choose to see the essential differences that remain as complementary rather than contradictory. Armed with this general comparison, I then examine how the two papers address what is perhaps the fundamental post-Chandlerian puzzle. Although transportation and communication costs appear to have been declining in secular fashion since antebellum times, organizational structure has not change monotonically. Instead, as LTR have noted, it has followed a pronounced hump-shape pattern over time, moving from highly decentralized to integrated back to decentralized again. The question of why this has happened is crucial to how we assimilate Chandler into a new framework.

Chandler, vertical integration, corporation, transaction costs, new economy, business history

Abstract:
Most economic analyses of path creation and dependence are stories about how standards create network externalities - and thus potential "lock-in" - in technological systems like personal computers or high-definition television. This paper examines similar questions of path creation and dependence in the context of behavioral rather than technological standards. (Standards, we note, are at base a kind of social institution; and social institutions are recurrent patterns of behavior that help to coordinate human activity.) The papers focuses on the setting of standards for medical education and medical practice in the United States in the early twentieth century. Drawing on the economic theory of the professions articulated by Savage (1994), we argue that those standards proved "enabling" in that they created a decentralized network that was open to ideas from outside and was able to collaborate easily in the interdisciplinary fashion that proved crucial for the development of new devices and techniques.

Abstract:
Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organizational structures - what Langlois and Robertson (1995) call "business institutions." But few have thought about the choice of business institution as a competitive weapon. This essay will examine, and attempt to learn from, a case in which choice of organizational form is in fact a major element of competition.

Cluster tools, a type of equipment for manufacturing semiconductors, are becoming increasingly important as manufacturers attempt to pack more and more circuits on a chip. Within the U.S. industry, competition for these devices is divided between a large vertically integrated firm, Applied Materials, that designs and builds largely internally according to its own specifications and a large fringe of smaller, more specialized competitors. These latter have responded to the competition from Applied by creating a common set of technical interface standards, called the Modular Equipment Standards Committee (MESC) standards.

Rather than a battle of the standards, the current situation might best be thought of as a battle of alternative development paths: the closed system of Applied Materials, with its significant internal economies of scale and scope, and the open modular system of the competitive fringe, driven by external economies of standardization. At this point, the forces favoring the integrated development path are more-or-less evenly balanced against the forces favoring the path of technical standardization. I analyze these forces in terms of the tradeoff between the benefits of systemic innovation and systemic coordination on the one hand and the benefits of external economies of scope and modular innovation on the other. Although standards have so far kept the competitive fringe in the ballgame, modularity in the industry may ultimately take a different, and somewhat more familiar, form, as some of the larger firms adhering to the standards become broadly capable systems integrators who outsource manufacturing to specialized suppliers of subsystems.

Standards, semiconductors, semiconductor equipment, capabilities

Abstract:
Transaction costs, one often hears, are the economic equivalent of friction in physical systems. Like physicists, economists can sometimes neglect friction in formulating theories; but like engineers, they can never neglect friction in studying how the system actually does - let alone should - work. Interestingly, however, the present-day economics of organization also ignores friction. That is, almost single-mindedly, the literature analyzes transactions from the point of view of misaligned incentives and (especially) transaction-specific assets. The costs involved are certainly costs of running the economic system in some sense, but they are not obviously frictions. Stories about frictions in trade are not nearly as intriguing as stories about guileful trading partners and expensive assets placed at risk. But I will argue that these seemingly dull categories of cost - what Baldwin and Clark (2003) call mundane transaction costs - actually have a secret life. They are at least as important as, and quite probably far more important than, the more glamorous costs of asset specificity in explaining the partition between firm and market. These costs also have a secret life in another sense: they have a secret life cycle. I will argue that these mundane transaction costs provide much better material for helping us understanding how the boundaries among firms, markets, and hybrid forms change over time.

transaction costs, division of labor, modularity, standards, property rights

Abstract:
This paper's title is an echo of Alfred Chandler's (2001) chronicle of the electronics industry, Inventing the Electronic Century. The paper attempts (A) a general reinterpretation of the pattern of technological advance in (American) electronics over the twentieth century and (B) a somewhat revisionist account of the role of organization and institution in that advance. The paper stresses the complex effects of product architecture and intellectual property regime on industrial organization and technological change. Whereas large research-oriented multi-divisional firms always played a crucial role in the industry's history, such firms proved most adept at systemic innovation, as in the case of television. But, as in the cases of early radio and of the IBM 360 mainframe computer, the multi-divisional firm was capable of bottling up within its boundaries (often through intellectual property rights) a relatively modular architecture whose "option value" such firms could not fully exploit. America's adherence to the model of industrial research within the vertically integrated corporation arguably contributed to the demise of American consumer electronics in the 1970s and 1980s. And America's subsequent relative success in semiconductors and personal computers - and in today's converged digital consumer electronics - owes much to the specialized and "fragmented" character of American industry, which could take fuller advantage of competitive global value chains and of the option value of modular architectures.

electronics, modularity, product architecture, vertical integration