The economics of Cory

Doctorow’s Makers
Alberto Cottica

Originally published as a post on http://alberto.cottica.net in August 20101

1. What is Makers?
Makers is a novel, published in 2009 by Canadian science fiction author and Boeing Boeing co-
editor Cory Doctorow. It deals with two entrepreneurs from the DIY scene (think MAKE Magazine,
or Wired’s Second Industrial Revolution), Perry Gibson and Lester Banks, inventing new things.
Their inventions transform the world around them, not so much from a technical as from a social
and economic point of view. They give rise to a highly decentralized organization and business
model called “New Work” in the fictional context of the novel. I was referred to it by friends in the
Italian physical hacking scene in early 2009.
When I first read the book I found it very prophetic, in the way that the best science fiction can be;
also, I was stricken by how much of it translated pretty directly into widely accepted economic
theory. After musing on it for about a year, I have become a convert (so much that I have
participated in Arduino-based projects and started out experimenting with economic policy for
makers). At the same time, though – in the context of some research that I am involved with – I
have started to ask myself if the “innovation society” we seem to be trying to build (witness the
Lisbon Strategy and innumerable policy documents) is indeed sustainable. Increasing quantities of
innovation, after all, sort of implies the economy growing at an increasing rate, and this is likely to
have straining side effects on the natural environment or even our own human limitations. Does
innovation have a dark side? How much of can we take without descending into dystopia?
Doctorow has created a pretty believable fictional economy which seems to be, in some sense, the
innovation society we are heading for. So I decided to study it more closely: that is, re-read the
book with an economist’s eyes, to zero in on the economics of what’s going on in there.

2. Schumpeter’s creative destruction

The main economic engine in the world of Makers is Schumpeter’s theory of creative destruction. It
is laid out straight from chapter one by CEO Landon Kettlewell in the press conference to
announce the Kodak-Duracell merger:

1Sorry, no references on this essay. It is intended as a waypoint in my thinking, and not for journal
publishing. All references are easy to check out on Google, Wikipedia or any university library.
 Capitalism is eating itself. The market works, and when it works it commodifies or obsoletes
everything.
At the end of the press conference, reporter Suzanne Church – who used to be an economic
journalist in Detroit, and as such covered the demise of the car ecosystem – muses about being
haunted by decay, even in the Silicon Valley, which was supposed to have incorporated failure as
just a step on the road to ultimate success:
Now she was back in that old rustbelt funk, with the feeling that she was witness not to a
beginning, but to a perpetual ending, a cycle of destruction that would tear down everything
solid and reliable in the world.
Commodification and obsolescence, however, should be thought as a feature, not a bug. It is, in
fact the way capitalism produces abundance. Tjan is well aware of this:
So, if you want to make a big profit, you’ve got to start over again, invent something new, and
milk it for all you can before the first imitator shows up. The more this happens, the better
and cheaper everything gets. It’s how we got here, you see. It’s what the system is for.

3. Price wars and Bertrand equilibrium

The mechanism that drives the “destruction” part of creative destruction in Makers is cut-throat
price competition. Innovative products are undercut by imitators, who scoop up the entire market
thanks to lower prices. The process is iterated until the price reaches cost (including an acceptable
remuneration of risk and capital):
In a good market, you invent something and charge all the market will bear for it. Someone
else figures out how to do it cheaper, or decides they can do it for a slimmer margin [...] They
do it and so you have to drop your prices to compete. Then someone comes along who’s
less greedy or more efficient than both of you and undercuts you again, and again and again,
until eventually you get down to [...] a baseline that you can’t get lower than, the cheapest
you can produce and stay in business.
This is Tjan speaking on his first night at the Perry Gibson - Lester Banks venture. He is a former
business school teacher; to an economist, he is describing Bertrand competition, a price war
leading to a zero-profit equilibrium.

4. Labor economics issues

Creative destruction rearranges elements in the economic system, supposedly for the good.
Unfortunately, some of these elements are people, and rearranging may involve a lot of pain,
humiliation and fear. Doctorow embeds labour economics issues deep into the novel: the Kodacell
press conference is interrupted by a protest of laid off staffers. Kettlewell’s first email to Suzanne
asks the big question looming underneath Makers:
What happens when all the things you are good at are no good to anyone anymore?
Research initiated at the beginning of the current recession has cast doubts about the possibility to
successfully mass-retrain a laid-off workforce to adjust to the changing needs of an innovation
economy. Labour supply seems still oriented to selling man-hours and expecting to be managed in
a more or less traditionally Tayloristic way.

5. Brian Arthur’s building-block technology

When Suzanne reaches Perry Gibbons and his sidekick Lester’s den to be shown what it is they
do, Perry demonstrates their method to technical innovation. Basically, it consists of recombining
existing technology in new ways. This is not only possible, but dirt cheap and fundamentally easy,
because, in Perry’s words
Everywhere you look there’s devices for free that have everything you need to make
anything do anything.
And Lester is even more concrete:
You know how they say a sculptor starts with a block of marble and chips away everything
that doesn’t look like a statue? Like he can see the statue in the block? I get like that with
garbage: I see the pieces on the heaps and in roadside trash, and I can just see how it can
go together.
Makers subscribes to Brian Arthur’s theory of innovation: making new things is (mostly) about
finding new ways to recombine existing building blocks. Successful combinations become, in their
turn, new blocks, so that an initially simple technology (the famous six simple machines of the
ancient greeks) bootstraps to increasing levels of sophistication.

6. Becattini and Brusco’s competitive-cooperative

manufacturing systems
The global competitiveness of Perry and Lester’s ventures depend on the neutrality of unit costs
with respect to production volume – in other words, no economies of scale. Perry and Lester’s
Florida junkyard is an optimal production unit. In Tjan’s words
Every industry that required a factory yesterday requires a garage today.
Of course, it’s hard to get away from the fact that a lot of the cheapness in the system comes from
exploiting economies of scale. The trick is that component manufacturing is scale-intensive, but the
artifacts that Perry and Lester are interested in, being assemblies of such components, have a
much lower minimum efficient production scale. In such a scenario, manufacturing systems most fit
to compete are those that combine the agility of horizontal and vertical disintegration with low
transaction costs, mutual trust and informational transparence. Vertical disintegration lets firms
grow large where there are economies of scale to be exploited (components, silicon chips);
horizontal disintegration enhances competition in the finished goods market (even though
whichever manufacturers will win out in any given period of time will still buy components from the
same handful of suppliers, therefore saving on the costs of reallocation of workers and
manufacturing capacity); low transaction costs enable vertically disintegrated “manufacturing“ units
like Perry and Lester’s (mostly R&D and business development, really) to build ad hoc networks of
suppliers fast. In other words, New Work displays both tough competition and cooperation over
and above formalized contracts.
Brusco and Becattini’s model of industrial districts display just these characteristics (as, with
different nuances, the work of researchers as Charles Sabel, Michael Piore and Annalee
Saxenian). In Makers the low transaction costs part is implemented top-down through networked
company Kodacell rather than, as in Brusco and Becattini, bottom-up through evolving conventions
and reputation effects in a small territory, home to all the forms involved. So, when Lester invents
Home Aware, an ecosystem can be summoned out of Kodacell’s decentralized “teams” structure.
Tjan explains:
There are ten teams that do closet organizing in the network, and a bunch of shippers,
packers, movers and storage experts. A few furniture companies. [...] The plan is to start our
sales through the consultants at the same time as we start showing at trade shows for
furniture companies.

7. The European Commission’s Living Lab

After a fire at a shantytown near the factory, Perry decides to let the inhabitants rebuild it on
Kodacell premises (formerly a junkyard), which is largely unused. Kettlewell tries to get him to oust
them. Perry holds his ground: he, Lester and Tjan had been meaning to invent something for the
homeless people anyway.
We’ve built a living lab on our doorstep for exploring an enormous market opportunity to
provide low-cost, sustainable technology for use by a substantial segment of the population
who have no fixed address. There are millions of American squatters and billions of squatters
worldwide. They have money to spend and no one else is trying to get it from them.
The Living Lab is a concept explored by the European Commission in the context of innovation
policy. The idea is to replace lab tests of new products with much larger scale, more realistic tests
made possible a dense network of many actors collaborating on the same territory. Perry’s in-
house shantytown would become a toy universe to model the squatters market: Kodacell can
invent something and run a market test with limited costs and in a short time. More importantly, it
can recruit squatters themselves to participate in identifying needs and designing the products.
And in fact it can: this is the role of the unofficial shantytown leader, Francis, who collaborates
closely with Perry and Lester to think up new products.

8. Arrow’s Paradox and the value of invention

New Work’s downfall is heralded by an investor confidence crisis in Kodacell. Part of the problem
is that analysts have a hard time figuring out how to value inventions, that are becoming an
important part of Kodacell’s market value (the other part is inherent scarcity of genuine
entrepreneurship). Kodacell ends up with a lot of novel products, with high returns on small
projects. How many of these projects are going to scale to be large hits? Kettlewell:
Guys, the major shareholders are going to start dumping their stocks this week. [...] They’re
doing because they can’t figure out how to value us.
This is yet another version of Kenneth Arrow’s famous paradox: markets for information typically
don’t work well, because, in order to estimate precisely the value of something you need to know
all about it. But information, of course, has no value if you know it already. Invention is essentially
information: until it is on the market and has climbed the diffusion curve, it is quite difficult to value
it.

9. The New Work bust and the shift in consumer

preferences
When part 2 of Makers opens, the New Work movement is over. A stock market bust has shattered
the Kodacell business model, promptly imitated by other large companies such as Westinghouse
(who hires Tjan off Kodacell). As a result, the movement is dead. Perry and Lester, still in their
junkyard in Florida, open up a ride, which is to be the subject of the rest of the book. The New
Work bust is one of the least convincing parts of the book from an economist’s point of view: save
for the aforementioned value of invention issue, it is hard to make out anything that would provoke
more than a short-term market fluctuation. Kettlewell:
Analysts couldn’t figure out how to value us. Add a little market chaos and some old score-
settling @##holes [...] and it’s a wonder we lasted as long as we did.
Even less convincing is the ensuing consumer disaffection for the goods that New Work had
produced. In Perry’s words:
No one cares about invention anymore.
There is no obvious reason why this should happen. The second Perry-Lester invention, Home
Aware, has been very successful, shipping a million units in six weeks. One would think that, even
if the company originally producing it went bust, a competitor would step in to service and expand
the existing customer base. After the 2000 dotcom bust consumers actually increased their use of
services that they found useful, undaunted by their association with dotcoms. Yahoo, Google,
Amazon and the like continued to prosper.
 NASDAQ monthly closing
e-commerce USA (10 x million $)

5000

3750

2500

1250

dic 99 dic 00 dic 01 dic 02 dic 03 dic 04 dic 05 dic 06 dic 07 dic 08 dic 09

Sources: www.economagic.com; U.S. Department of commerce (quarterly, nominal,

seasonally adjusted)

10. So, is the innovation society sustainable in

Makers?
Sustainability questions are tricky. Time and again, scientists from have made doomsday
predictions that went viral as public opinion found them really convincing, but later turned out to be
way off the mark. From Malthus to the Club of Rome and the Millennium Bug, we seem to have a
bias towards underestimating the adaptability of our society and its economy (cultural change
makes the birth rate drop, raising prices of oil increase the energy efficiency of GDP and so on).
Doomsday feels right at some level: it may just be a heritage of our Neolithic past, or a very deeply
ingrained cultural myth (Apocalypse, Ragnarok etc.). Certainly that suggests a lot of caution in
predicting it.
The economics of New Work are at least plausible; its downfall is the least plausible of its features.
I was expecting something like Kodacell and Westinghouse spinning off their New Work branches,
or selling them to more nimble, lower overhead companies that would commodify the networked
organization and finance that the giant companies have to offer. The history of open source has
already shown that you don’t really need a large company to achieve coordination, after all. The
book, however, ends on a deeply pessimistic note: the large evil company has won the battle
against the ride movement and recruited Lester, neutralizing his innovative potential; Perry has
become a sort of wandering troubleshooter, lonely and poor. Doctorow the economist seems to be
supportive of the innovation society, but Doctorow the author definitely is not. I wonder – really
wonder – which if the two Doctorows will be right in the end.