May

4

Innovations: Wide, Deep, and Long

Filed Under Markets, Software | 

Ludwig Lachmann, discussing the problem of diminishing returns in Capital and Its Structure, makes the following argument:

Where existing capital is merely duplicated (’widened’), operated by a given labour force, diminishing returns will soon appear. Where new capital resources, but of the type employed before, are being substituted for labour (’deepened’), we may have to wait a little longer for diminishing returns to make their appearance, depending on the elasticity of substitution, but appear they will in the end. The only way in which we can hope to resist the pressure of diminishing returns is by changing the composition of capital and enlisting an indivisibility which, with fewer complementary capital resources, could not have been used.

This seems like a useful way to think about the potential value of a software project.

In the ‘widening’ category are systems that provide access to an established capability for a larger number of people. The cloning of a popular tool’s functionality may be a good example. Such systems may increase output, but will be limited by demand and preferential attachment effects for existing systems.

‘Deepening’ efforts improve on existing functionality in such a way that each user can be more productive. I’m sketching these notes in Scrivener, a tool that I find allows me to be much more productive than, say, Microsoft Word, even though they both support the same core task.

The final category, ‘lengthening’, is maybe the most interesting. Lachmann’s explanation gives us a way to think about a specific kind of “doing something new” by stressing the importance of indivisibility and complementarity. From earlier in the same chapter of Capital and Its Structure:

Complementarity plus indivisibility are the essense of the matter. It will not pay to install an indivisible capital good unless there are enough complementary capital goods to justify it. … Economic progress thus requires a continuously changing composition of the social capital. The new indivisibilities account for the increasing returns. … We must note that the introduction of new indivisible resources, feasible only when the volume of complmentary capital reaches a certain size, will as a rule also entail a change in the composition of this complementary capital…

One of Lachmann’s examples of indivisibility is a railroad: It will not be practical to construct a railroad until the amount of goods in transit reaches a certain threshold. Once the railroad is in place, it is complementary to a wide array of other capital goods. New opportunities are created and old ones destroyed, often in a discontinuous fashion.

The advent of VisiCalc is an analogous scenario. Developing a spreadsheet would have made little sense until computing power had increased (and price decreased) to a certain threshold. Once spreadsheet software was available, a computer suddenly became a useful tool for businesses that before would have never considered bothering with one. This was a huge win for those businesses and for the providers of the new technology. (This Schumpeterian shift, of course, also meant that the producers of and specialists in the old techniques and technology had to adapt the new world.)

More recently, we see systems like Google, which would have made little sense before the mass of available web content reached a certain threshold. Similarly, YouTube made little sense in a world of dial-up internet and expensive digital video cameras. Google, of course, bought YouTube, following the somewhat lackluster response to its own video site. At least to the casual user, there appeared to be little technical difference between the original Google Video site and YouTube. I vaguely recall that at one point, Google Video seemed more stable on my Mac. Ultimately, though, Google Video may have succeeded in widening the technology (introducing more people to the idea of an online video community, supporting a broader range of platforms) or deepening it (by providing a better interface, easier uploads, etc…), but YouTube had already recognized and taken advantage of the lengthening opportunity.

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