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Category: Employment Law

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A Time for Action: The Double Gain of Freer Regions and the Double Speak about Talent Droughts

As Catherine Fisk and Danielle Citron point out in their thoughtful reviews here and here, the wisdom of freeing talent must go beyond private firm level decisions; beyond the message to corporations about what the benefits of talent mobility, beyond what Frank Pasquale’s smartly spun as “reversing Machiavelli’s famous prescription, Lobel advises the Princes of modern business that it is better to be loved than feared.” To get to an optimal equilibrium of knowledge exchanges and mobility, smart policy is needed and policymakers must to pay attention to research. Both Fisk and Citron raise questions about the likelihood that we will see reforms anytime soon. As Fisk points out — and as her important historical work has skillfully shown, and more recently, as we witness developments in several states including Michigan, Texas and Georgia as well as (again as Fisk and Citron point out) in certain aspects of the pending Restatement of Employment — the movement of law and policy has actually been toward more human capital controls rather than less. This is perhaps unsurprising to many of us. Like with the copyright extension act which was the product of heavyweight lobbying, these shifts were supported by strong interest groups. What is perhaps different with the talent wars is the robust evidence that suggests that everyone, corporations large and small, new and old, can gain from loosening controls. Citron points to an irony that I too have been quite troubled by: the current buzz is about the intense need for talent, the talent drought, the shortage in STEM graduates. As Citron describes, the art and science of recruitment is all the rage. But while we debate reforms in schooling and reforms in immigration policies, we largely neglect to consider a reality of much deadweight loss of through talent controls.

The good news is that not only in Massachusetts, where the governor has just expressed his support in reforming state law to narrow the use of  non-competes, but also in other state legislatures , courts and agencies, we see a greater willingness to think seriously about positive reforms. At the state level, the jurisdictional variations points to the double gain of regions that void or at least strongly narrow the use of non-competes. California for example gains twice: first by encouraging more human capital flow intra-regionally and second, by its willingness to give refuge to employees who have signed non-competes elsewhere. In other words, the positive effects stem not only from having the right policies of setting talent free but also from its comparative advantage vis-à-vis more controlling states. This brain gain effect has been shown empirically: areas that enforce strong post-employment controls have higher rates of departure of inventors to other regions. States that weakly enforce non-competes are on the receiving side of the cream of the crop. One can only hope that legislature and business leaders will take these findings very seriously.

At the federal level, in a novel approach to antitrust the federal government recently took up the investigation of anti-competitive practices between high-tech giants that had agreed not to poach one another’s employee. This in fact relates to Shubha Gosh’s questions about defining competition and the meaning of free and open labor markets. And it is a good moment to pause about the extent to which we encourage secrecy in both private and public organizations. It is a moment in which the spiraling scandals of economic espionage by governments coupled with leaks and demand for more transparency require us to think hard. In this context, Citron is right to raise the question of government 2.0 – for individuals to be committed and motivated to contribute to innovation, they need some assurances that their contributions will not be entirely appropriated by concentrated interests.

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Talent Wants to Be In Control

Many thanks to Deven and Orly for organizing this online symposium and for letting me join in.  Talent Wants to Be Free is a real tour de force: original and engaging, thoughtful and thought-provoking.  Orly is likely the only person who could have written this book, as it deftly combines research from a variety of academic literatures to make novel observations while at the same time remaining understandable and even approachable.  As other participants have mentioned, I do hope it gets read by policymakers and thought leaders who are contemplating how to bring more innovation to their city, state, or country.  Given the burgeoning interest in entrepreneurship (see, e.g., this program on St. Louis), the book should find a place on many bookshelves.

Since I’m starting in the midst of an already heady discussion, I wanted to build on what Shuba and Vic mentioned about the theory of the firm, as well as Orly’s response.  I argue in a forthcoming paper that our notion of “employment” is completely connected to our idea of the economic firm: you can’t have employees without an employer, and the employer is a firm.  Why do we have these mechanisms for joint production?  The short answer, I think, is that we need firms to facilitate joint production.  There’s only so much we can do on our own, and once we start working together we need legal and economic structures to manage that collaboration.  Shuba and Vic both discuss how the theory of the firm literature might provide an antithesis to Orly’s thesis in terms of the benefits of organized team structures that, to some extent, constrain individual workers. Orly’s response agrees that firms play a useful role, but she argues that much of the existing theory-of-the-firm literature depends on the “orthodox” model of employer protectionism.  However, I think both sides are missing an important aspect of the issue: namely, the governance of firms.

In both academic and popular literature, employers/firms/corporations are characterized as large, faceless institutions that act autonomously in their own self-interest.  But firms are just collections of individuals with various economic and legal relationships who are acting together in the context of a legal entity.  In other words, employers are people too — not individual persons, but groups of people.  Do some of the restrictions we are talking about look less onerous if we think of employers as groups of people?  Let’s take, for example, the work-for-hire doctrine.  Does that doctrine look less punitive if five people create a firm to work together on a collection of projects, and they jointly agree to share their intellectual property rights with one another?  If one of the five breaks the deal and takes off with the rights to a key component of the research, the work-for-hire doctrine looks like it’s pro-employee — at least, for the four other employees involved.  Although Orly’s Evan Brown example (pp. 141-44) looks like blatant opportunism by a large corporation, in other instances employees as a whole may end up better off if one of their number can’t defect to the detriment of the joint enterprise.

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Management Wants Precarity: A California Ideology for Employment Law

LaborShareThe reader of Talent Wants to be Free effectively gets two books for the price of one. As one of the top legal scholars on the intersection of employment and intellectual property law, Prof. Lobel skillfully describes key concepts and disputes in both areas. Lobel has distilled years of rigorous, careful legal analysis into a series of narratives, theories, and key concepts. Lobel brings legal ideas to life, dramatizing the workplace tensions between loyalty and commitment, control and creativity, better than any work I’ve encountered over the past decade. Her enthusiasm for the subject matter animates the work throughout, making the book a joy to read. Most of the other participants in this symposium have already commented on how successful this aspect of the book is, so I won’t belabor their points.

Talent Want to Be Free also functions as a second kind of book: a management guide. The ending of the first chapter sets up this project, proposing to advise corporate leaders on how to “meet the challenge” of keeping the best performers from leaving, and how “to react when, inevitably, some of these most talented people become competitors” (26). This is a work not only destined for law schools, but also for business schools: for captains of industry eager for new strategies to deploy in the great game of luring and keeping “talent.” Reversing Machiavelli’s famous prescription, Lobel advises the Princes of modern business that it is better to be loved than feared. They should celebrate mobile workers, and should not seek to bind their top employees with burdensome noncompete clauses. Drawing on the work of social scientists like AnnaLee Saxenian (68), Lobel argues that an ecology of innovation depends on workers’ ability to freely move to where their talents are best appreciated.

For Lobel, many restrictions on the free flow of human capital are becoming just as much of a threat to economic prosperity as excess copyright, patent, and trademark protection. Both sets of laws waste resources combating the free flow of information. A firm that trains its workers may want to require them to stay for several years, to recoup its investment (28-29). But Lobel exposes the costs of such a strategy: human capital controls “restrict careers and connections that are born between people” (32). They can also hurt the development of a local talent pool that could, in all likelihood, redound to the benefit of the would-be controlling firm. Trapped in their firms by rigid Massachusetts’ custom and law, Route 128′s talent tended to stagnate. California refused to enforce noncompete clauses, encouraging its knowledge workers to find the firms best able to use their skills.

I have little doubt that Lobel’s book will be assigned in B-schools from Stanford to Wharton. She tells a consistently positive, upbeat story about management techniques to fraternize the incompatibles of personal fulfillment, profit maximization, and regional advantage. But for every normative term that animates her analysis (labor mobility, freedom of contract, innovation, creative or constructive destruction) there is a shadow term (precarity, exploitation, disruption, waste) that goes unexplored. I want to surface a few of these terms, and explore the degree to which they limit the scope or force of Lobel’s message. My worry is that managers will be receptive to the book not because they want talent to be free in the sense of “free speech,” but rather, in the sense of “free beer:” interchangeable cog(nitive unit)s desperately pitching themselves on MTurk and TaskRabbit.
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Talent Flow and the Theory of the Firm

Both Vic Fleisher and Shubha Ghosh in their thoughtful commentary about Talent Wants to Be Free invoke the theory of the firm to raise question about the extent of desirable freedom in talent and knowledge flows. In its basic iteration, the theory of the firm suggests that arms-length contracting will not be optimal when one party has the ability to renegotiate and hold the other party up, which is the conventional rational for the desirability of talent controls. This is what I describe in the book as the Orthodox Model of employment intellectual property: firms fear making relational investment in employees and then having the employees renegotiate the contract under a threat of exit. Firms respond through mobility restrictions aimed at eliminating the transaction costs of this kind of opportunism. In the book, I accept, at least for some situations, this aspect of the benefits and confidence that are created for firms in internalizing production and ensuring ongoing loyalty by all players. The orthodox model thus explains post-employment controls as necessary to encourage optimal investment within the corporation. More company controls = more internal R&D and human capital investment. The new model developed in the book doesn’t deny these benefits but argues that the orthodox model is incomplete. The Dynamic-Dyadic Model asks about the costs and benefits when controls are employed.  It suggests that yes, often, protecting human capital and trade secret investments is often in the immediate interest of a company, but that too much control becomes a double-edged sword. This is because of both the demotivating effects on employee performance when lateral markets are reduced and because over-time, although information leakage and job-hopping by talented workers may provide competitors with undue know-how, expertise, and technologies, constraining mobility reduces knowledge spillovers and information sharing that outweigh the occasional losses. The enriched model is supported by a growing body of empirical evidence that finds that regions with less controls and more talent freedom, such as California, have in fact more R&D investment, quicker economic growth and greater innovation.

Vic is of course right that one solution to this problem is to recreate high-powered (market-like) incentives for performance within the firm. This is an aspect that I am greatly interested in and I analyze it in Talent Wants to Be Free as the question of whether controls and restrictions can effectively alternate with the carrots of performance-based compensation, vesting interests, loyalty inducing work environments, employee stock options and so forth. I too like Shubha am a fan of Hirschman’s Exit, Voice, and Loyalty and have found it useful in analyzing employment relations. I view the behavioral research as shedding light on these questions of what these intra-firm incentives need to look like in order to preserve the incentive to innovate. In a later post I will elaborate on the monitoring and motivational tradeoffs that exist in individual and group performance.

More generally, though, the research suggests that at least in certain industries, most paradigmatically fast-paced, high-tech fields, innovation is most likely when the contracting environments have thick networks of innovators that are mobile (i.e. Silicon valley) and firms themselves are horizontally networked. The flow of talent and ideas is important to innovation and rigid boundaries of the firm can stifle that interaction even with the right intra-firm incentives. The benefits in terms of innovation rise in these structures of denser inter-firm connections, but also, the costs of opportunism that drive the conventional wisdom are in fact lower than the traditional theory of the firm would predict. This is because talent mobility is a repeated game and at any given moment, a firm can be on either side of the raiding and poaching.   Policies against talent controls have the effect of reducing the costs of opportunistic renegotiation by ensuring the firm can hire replacement innovators when it loses its people. To push back on Vic’s phrasing, talent wants to be appreciated and free. MIT economist Daron Acemoglu’s analysis of investments and re-investments in workers as a key ingredient of production and growth is helpful in understanding some of this dynamic. People invest in their own human capital without knowing the exact work they will eventually do, just as companies must make investment decisions in technology and capital funds without always knowing who they will end up hiring. Acemoglu describes the positive upward trajectory under these conditions of uncertainty: When workers invest more in their human capital, businesses will invest more because of the prospects of acquiring good talent. In turn, workers will invest more in their human capital as they may end up in one or more of these companies.  The likelihood of finding good employers creates incentives for overall investments in human capital.

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Human Capital Law and Innovation Policy

This is a thrilling week for Talent Wants to Be Free. I am incredibly honored and grateful to all the participants of the symposium and especially to Deven Desai for putting it all together. It’s only Monday morning, the first official day of the symposium, and there are already a half a dozen fantastic posts up, all of which offer so much food for thought and so much to respond to. Wow! Before posting responses to the various themes and comments raised in the reviews, I wanted to write a more general introductory post to describe the path, motivation, and goals of writing the book.

Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids and Free Riding comes at a moment in time in which important developments in markets and research have coincided, pushing us to rethink innovation policy and our approaches to human capital. First, the talent wars are fiercer than ever and the mindset of talent control is rising. The stats about the rise of restrictions over human capital across industries and professions are dramatic.  Talent poaching is global, acquisition marathons increasingly focus on the people and their skills and potential for innovation as much as they look at the existing intellectual property of the company. And corporate espionage is the subject of heated international debates. Second, as a result of critical mass of new empirical studies coming out of business schools, law, psychology, economics, geography, we know so much more today compared to just a few years ago about what supports and what hinders innovation. The theories and insights I develop in the book attempt to bring together my behavioral research and economic analysis of employment law, including my experimental studies about the effects of non-competes on motivation, my theoretical and collaborative experimental studies about employee loyalty and institutional incentives, and my scholarship about the changing world of work, along with theories about endogenous growth and agglomeration economies by leading economists, such as Paul Romer and Michael Porter, and new empieircal field studies by management scholars such as Mark Garmaise, Olav Sorenson, Sampsa Samila, Matt Marx, and Lee Fleming. Third, as several of the posts point out, these are exciting times because legislatures and courts are actually interested in thinking seriously about innovation policy and have become more receptive to new evidence about the potential for better reforms.

As someone who teaches and writes in the fields of employment law, I wrote the book in the hopes that we can move beyond what I viewed as a stale conversation that framed these issues of non-competes, worker mobility, trade secrets and ownership over ideas  as labor versus business; protectionism versus free markets (as is often the case with other key areas of my research such as whistleblowing and discrimination). A primary goal was to shift the debate to include questions about how human capital law affects competitiveness and growth more generally. Writing about work policy, my first and foremost goal is to understand the nature of work in its many evolving iterations. Often in these debates we get sidetracked. While we have an active ongoing debate about the right scope of intellectual property, under the radar human capital controls have been expanding, largely without serious public conversation. My hope has been to encourage broad and sophisticated exchanges between legal scholars, policymakers, business leaders, investors, and innovators.

And still, there is so much more to do! The participants of the symposium are pushing me forward with next steps. The exchanges this week will certainly help crystalize a lot of the questions that were beyond the scope of the single book and several new projects are already underway. I will mention in closing a couple of other colleagues who have written about the book elsewhere and hope they too will join in the conversation. These include a thoughtful review by Raizel Liebler on The Learned FanGirl, a Q&A with CO’s Dan Solove, and other advance reviews here. Once again, let me say how grateful and appreciative I am to all the participants. Nothing is more rewarding.

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Talent Wants To Be Free Symposium: Lending Support to Lawmakers and Raising Questions for Open Government Efforts

Like my fellow symposium participants, I loved Orly’s book. As Catharine Fisk noted, Orly’s stories and lessons, informed by literature, experiments, and more, captivated me. Beside teaching me much, more importantly, it will educate policymakers. Talent Wants to Be Free serves as a slam-dunk rebuttal to those who say that legal scholarship lacks value in the real world. Orly’s book is a must read for state legislators interested in encouraging innovation in their backyards. Some lawmakers have proposed bills to limit or eliminate non-compete agreements as contrary to public policy. As Orly’s book demonstrates, good for them and for all of us. Orly’s book provides powerful arguments for the adoption of those laws and for other states to pay attention. And it sounds like an upcoming Restatement will recommend rules that would send judges in the opposite direction–towards less mobility, not more. They too need to read Orly’s original research and powerful arguments.

The book raised an interesting disconnect about our understanding of the mobility of talent. On the one hand, the media is all abuzz about companies that find talent for employers who presumably could move from their current jobs. As a recent New York Times piece discussed, analytics firms crunch data to search for and assess specialized talent in particular fields. Remarkable Hire scores a candidate’s talents by looking at how others rate her online contributions. Talent Bin and Gild create lists of potential hires based on online data. According to the Times, big-name companies like Facebook, Wal-Mart, and Amazon use these technologies to find and recruit job candidates. These stories don’t take into account the barriers that Orly’s book discusses: strictly interpreted non-compete agreements and their functional equivalents such as the inevitable disclosure of trade secrets concept. These analytics firm are likely to identify fabulous talent who cannot realistically move or at least may not be worth the money to buy them out of their non-competes. Of course, California companies like Facebook can gorge on Big Data about talent all they want–California lawmakers have banned non-competes.

A concern that came to mind is whether Government 2.0 efforts are worth it for employees. What if employees spend their free time innovating for government and it turns out that they shared some skill that their employer can claim ownership over or worse sue the employee for spilling trade secrets. Reading Orly’s book raised concerns about the practical problems and perils raised by lending one’s time to government hack-a-thons and the like. I don’t have any concrete answers to these problems except to tell lawmakers and employers to listen to Orly’s recommendations.

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Beyond Lawyers: Thoughts on Talent Wants To Be Free

This book is a terrific synthesis of many literatures on legal rules regulating employee-generated intellectual property, human capital, and the nature of innovation. Through her broad and perceptive reading in law, economics, sociology, geography, psychology, and organizational behavior, among other fields, Lobel has compiled a persuasive argument in favor of free employee mobility. She explains the law of trade secrets, noncompetition and nondisclosure agreements, pre-invention assignment agreements, and works for hire in copyright in terms that can be understood by nonlawyers. She explains economic concepts like prisoners’ dilemmas, agglomeration economies, and the rigidity of labor markets in simple terms and links them to legal rules and to news accounts of how legal rules affect company and employee behavior.

One of the book’s great strengths is how engaging the writing is and how deftly Lobel constructs her synthesis. The prose style is jaunty. The examples are ripped from the pages of the Wall Street Journal, magazines aimed at business readers, academic studies published in peer-reviewed journals of business and economics, as well as canonical stories of genius inventors and entrepreneurs ranging from Ben Franklin to Thomas Edison to Steve Jobs. In a mere two pages, she skips from academic studies of business to anecdotes about her experiences consulting with inventors to a story reported in Forbes Magazine to Joseph Schumpeter’s classic economic works published in the 1920s (pp. 202-203). She makes great use of a diversity of sources to develop her argument about why the law ought to allow a great deal more mobility of human capital than it currently does.

The book is clearly aimed at an audience of business people and policy makers rather than legal scholars. As she says at the end, “If many of your best employees are leaving you, it serves as a warning sign to make changes.” (p. 244) That is all to the good. Many of the ideas in this book aren’t new – scholars have been criticizing overbroad enforcement of noncompetes, trade secrets, and invention and copyright assignments for decades, and the research on agglomeration economies (like Silicon Valley) is no longer novel. But the broad scholarly consensus in both law and business/economics that employee mobility leads to economic growth has not yet had much impact on law. Indeed, the proposed Restatement of Employment Law is poised to make some aspects of the law in this area more hostile to employee mobility. So an appeal to nonlawyers seems essential. As Lobel points out (pp. 72-73), at least one state (Massachusetts) has been engaged in a serious look at whether to dramatically change its laws governing noncompete agreements to allow much more employee mobility, and a book like this is tailor made to be read by legislators mulling over whether Massachusetts businesses would be helped or hurt by making noncompete agreements unenforceable. She translates the empirical work of a number of scholars into clear and simple lessons for business executives and policy makers.

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Talent Wants to be Appreciated

Orly’s book is terrific–a model for pulling together theory, stories, and data to argue for a dynamic system of free-flowing employees, resources, and ideas. I am persuaded that non-competes and other human capital controls often cause more harm than good.

But amidst the many stories and studies, I would have welcomed more theory. Okay, employee mobility is good. But how good? How far should we push this idea?

Consider a society where every worker is an at-will contractor, working singly on a single project or task. Such a purely contractual world would be dynamic, as workers jump from project to project like insects chasing nectar. But would it maximize the value of production?

To have a theory of employee mobility, one must have a theory of the firm. Why do we have firms and employees in the first place, instead of a web of independent contractor relationships?  The idea of team production (Alchian & Demsetz) may be useful here: production may be maximized by working in teams. This seems to be as likely to be true for innovative production as any other form of production.

Through this team production lens, the critical information cost is the difficult and costly monitoring and metering of individual performance within a group activity. While Orly notes that “[t]oo much supervision can smother creative sparks” (p. 133), too little supervision means that high performers are not appreciated and rewarded. Organizing team production within a firm gives entrepreneurs and managers an incentive to monitor effectively. It is impossible to get performance incentives precisely right at the individual level, and unhappy employees have a tendency to jump ship. But human capital controls–hard or soft–may induce employees to stay put and allow managers to evaluate employees over a longer period of time.

(Soft controls–under the umbrella of what Orly calls “stickiness”–include health insurance, deferred comp, workplace perks (e.g. free food, working on a beautiful campus), and the transaction costs of moving.)

Firms are themselves a soft form of human capital control. When we agree to work for someone else, we give up some freedom. But the existence of firms is, perhaps, a better way to maximize team production and, at least under some conditions, to promote innovation.

My point is that talent doesn’t want to be free, it wants to be appreciated. Firms that find the most efficient way to appreciate and reward talent (financially and otherwise) without devolving into an eat-what-you-kill culture have a competitive advantage.

 

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The benefits of being free

I applaud Orly for this excellent contribution.  There is much to praise and much to comment on.  I was particularly attracted to the interdisciplinary perspective of the book and its heavy reliance on and reporting of studies in economics, psychology, and other literatures—including but not limited to Orly’s original research.  The book provides an excellent discussion of various dimensions of innovation studies.  It also provides compelling descriptions of many different real world contexts where the lessons from the academic studies play out on the ground.  The combination is quite amazing.  I also think it is quite important that she focused attention on people, and the human, social and intellectual capital that actually drives innovation across sectors.  Too often, innovation studies lose sight of the actual people involved.  Orly’s book covers so much ground and connects with various topics I’m also interested in.  It is difficult for me to pick a particular topic of theme to comment on in this blog post.  (I’m tempted, for example, to push her to say more about technology transfer offices at universities and how they’ve evolved over time in terms of their approach to control.  I also would like to hear *much* more about the application of commons governance ideas.)  Instead, I’ll say something about the broad ambition of the book.

Orly presents the book as new wisdom – a “dynamic model” — to challenge conventional wisdom – the “orthodox model” – about the necessity of strict control over talented employees, ideas, and various other complementary resources that drive creative and innovative progress and economic growth.  I think the book does a wonderful job of pointing out the many ways in which theoretical and empirical work across many fields of inquiry combine to challenge if not completely undermine the conventional wisdom.  Controls on the flow of ideas and employees often backfire and are costly to the firm and the public.  Orly describes very well the substantial benefits – benefits all too often ignored or assumed away – in sustaining the freedom to operate, to move, to experiment, to tinker, and so on.  She effectively makes the case for a much more nuanced approach to thinking about innovation and the various ways in which freedom (to operate, to move, to think, to experiment, to ride, etc.) impact innovation and social welfare more generally.

That said, I don’t think the book supplies a fully formed alternative vision, theory or model about what degree of control/freedom may be needed to sustain innovation.  The Goldilocks nature of the problem, which Orly describes, surfaces throughout, and it is hard to know where or how to strike the right balances as a matter of public policy (law) and private strategy (corporate practice).  The book at times seems to suggest that it will offer a solution or that the solution might be absolute freedom / no control.  But that is not really what the book ends up saying, as I understand it.  In the end, we remain stuck with the problem of nuance and variety and context- or industry-specific balancing.  Frankly, I don’t think this is a bad result at all; it’s probably where we need to be if we’re basing our judgments in reality.

For some reason, I was surprised when the book ended.  I wanted more.  I expected more.  In a sense, this is a good thing because the book provoked me to think about and look for more.  But I wonder whether the final part of the book could have tied the themes together a bit more tightly and at least proposed a research agenda for developing a more nuanced approach to innovation.  Many of the pieces of the puzzle are in Orly’s book.  But the puzzle remains incomplete.

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Fight the Power?

Orly’s book is terrific. Let’s just get that straight. The book is filled with the kind of creative energy that Orly’s reform proposals seek to release. But the emerging (or worse, entrenched) fud in me had to react to the celebration of freedom that the book exhorts. Throughout the past several centuries of human history, perhaps through all of human history, appeals to freedom have interrupted periods of dominance, control, and centralization.  “Talent Wants to be Free” is another example of the pendulum swinging away from centralized control. Whether that is a rightward or leftward swing, I will leave for others to sort out.  While Orly does not extol “stealing this book,” the arguments against over regulation by government (in the form of strong intellectual property laws) and against overly bureaucraticized mega-corporations have a Hoffmanesque quality. Of course, nothing wrong with that, but the skeptic in me wonders if unalloyed freedom is unquestionably a good thing.

Orly appeals to competition as an engine of innovation, and she points to many examples that limit the liberating force of competition. The proposition that competition fuels innovation is hard for anyone, in my mind, to contest.  Harder still is understanding what competition is.  Spencerian  renditions of Darwin as applied to social dynamics has been a recipe for disaster and elitism, leading to the very concentration that Orly decries. If competition is meant to guide innovation, it cannot be hard core laissez-faire. Is competition then the nicely diagrammed exposition of Econ 101, channeling Alfred Marshall into prices being driven to MC and minimum AC, profits dissipated, surpluses maximized, or perhaps the more elaborate auctioneering process Pareto optimally? Although an elegant formulation, the technical rendition of the dirty world of markets ignores the details of transactions and transacting, the role of legal rules and of technicians like corporate attorneys, accountants, and bankers. Perhaps  Coase has the right take on competition as a form of endless bargaining and negotiation as social costs and benefits are readily transformed, transaction costs willing, into private ones. I have no doubt that competition drives innovation, but the hard question is what kind of competition.  It is easy, however, to translate competition into unfettered freedom. That translation in my mind does not wholly work.

What is lost in translation by rendering competition as “freedom” is recognizing the need for organization to help free individuals reach their potential. Organization writ large here includes the family, the school, the business entity, and, yes, the state. Freedom without organization is anarchy and anarchy leads to either dissipation of energy into entropy (and yes that is a nod to the ideas of Thomas Pynchon, especially Gravity’s Rainbow in which flights of freedom give way Icarus-like to crashing and destruction) or to dominance and concentration by the powerful (another nod).  Neither is conducive to innovation.

Although Orly makes somes reference to Coase, I felt that there was not appreciation of his “A Theory of the Firm,” which  demonstrated that organization within an entity might be preferable to the freedom of exchange that is a hallmark of competition.  But Coase’s notion of the firm was not supplanting competition, Instead, by internalizing exchange, competition of sorts is brought into the organization as individuals vie for position within the hierarchy.  In this way, Coase is not justifying the Soviet state or centralized planning, both of which are ineffective and in opposition to innovation. Instead, consistent with Orly’s vision of freedom, the Coasean firm internalizes competition but also must confront competition that occurs through exit or dissent in order to avoid the exact forms of concentration that Orly correctly finds as antithetical to innovation.

My point here is that freedom is worthless without some form of organization that provides soil for freedom’s fruit. One example of this is the concern over D2P, a new acronym  a colleague recently assaulted on my overly taxed brain.  It stands for “Distribution to Product” and refers to the difficulty of going from labs to markets. Freedom within the university certainly leads to the creation of all sorts of inventions and new works.  The problem is the lack of institutions for facilitating the movement from the creative stage to the commercialization stage.  That movement is not dependent solely on the freedom of inventor, financier, marketer, and corporate attorney.  Instead such movement is impeded by too much freedom and not enough organization. Perhaps I am just raising dull questions about practical details.  But my point is that extolling freedom without organization may be as big a problem as extolling centralized control over freedom,

I will end with an advertisement for myself.  I have been working on a piece on nonprice competition and intellectual property, and I plan to write it after I finish my articles on the Federal Circuit’s contract law jurisprudence and Holmes’ intellectual property jurisprudence at the Mass and US Supreme Courts. The nonprice competition piece draws on Hirshcman’s theory of nonprice competition from his “Exit, Voice, and Loyalty.” Before I expand that piece into 50+ pages, let me try to distill that article-to-be into a few sentences.

Exit and voice serve as ways to promote competition through signals other than price.  Orly’s book provides a vivid and forceful exposition of exit and voice as examples of freedom.  But loyalty is necessary since organizations often act as the incubator for freedom. The problem is that loyalty can quash freedom through acts of provincialism, xenophobia, and blind faith. The difficult balance requires structuring loyalty so as not to supplant exit and voice but to channel those two freedoms into creating dynamic, evolving organizations that promote innovation.  In short, organization without freedom is tyranny, but freedom, without organization, is anarchy, with all its attendant costs.