Industrial Economy DNA

Sidebar: Industrial Economy DNA

Chicago, in being one of the foremost industrial regions, has industrial economy DNA. This DNA isn’t well suited to the first phase of the knowledge economy, which turns many industrial economy assumptions on their heads. For example, even more remarkable than tech companies’ ability to create wealth quickly is their lack of constraints from raw material inputs: these companies can be located anywhere, irrespective of natural resources. Their main physical requirements are power and fiber, which can be built or brought almost anywhere. In contrast, putting together an industrial enterprise involves accommodating materials with physical constraints at every turn: the sources of raw material inputs are often limited and scarce. Moving the material or parts from one area of the enterprise to another often requires special machines and specialized equipment. Dangerous chemicals are often involved in transforming raw materials. Disposing of waste is not trivial. Often, machinery to transform the raw materials must be custom built, and the machinery imposes its own constraints. Consequently, Chicagoans are accustomed to changes being incremental; we are accustomed to things taking time. This economy is bits, not bytes.

Chicago is renowned as a distribution hub, which began with its proximity to water. Since it was already a distribution hub when rail and air transport were born, this infrastructure was hard-wired into Chicago; a similar dynamic made it a fiber infrastructure hub. Transporting pigs is quite a different proposition from lumber, iron ore or hydrochloric acid. The process of meat packing is subject to spoilage, the type of animal, the markets and locations of customers. Dealing with these things is in Chicagoans’ DNA. Mastering their foibles is what made Chicagoans excel, and it’s hard to give up.

As discussed in The 3.x Economies, the agrarian economy preceded the industrial economy, and it was even more imbued with physical constraints. The point here is that we humans have hardwired into our brains the imprint of these economies’ lessons and impulses. Many of these do not apply in a knowledge economy, and that stymies us. The impulses are often so profound, we are not aware of them. People don’t change unless they have to. The fact that we are alive is testament to the fact that we made the right decisions in the past. This is a profound truth and difficult to deal with. It often makes us stick with something longer than we should.

Transformation is so difficult because it challenges us to selectively unlearn part of what we knew before. We have to figure out what parts of what made us successful in the past will help us in the future, and we have to modify the rest or throw them away.

To illustrate what I mean, here are some of the lessons that have made us successful in the past and which are altered drastically in the knowledge economy. Be warned, they contain myriad generalizations, and exceptions abound. Since we’re talking about deep beliefs of Chicagoans as a group of people (i.e. critical mass), I think they are relevant:

Industrial Economy Lessons Knowledge Economy Lessons
Barriers to entry are immense because they are based on topography and history; Chicago is the heart of the U.S. when it comes to distributing agricultural and industrial products to the U.S. and beyond. No city will replace Chicago as a distribution hub for physical products. This fact can lead to a certain smugness and imperviousness to change. Barriers to entry are often fleeting; a new alliance of hardware or network vendors could roust our software from its dominant position; this leads to legendary (and healthy) paranoia.
Zero sum: if I get that parcel of land by the river for my new plant, you can’t have it. If I make that tree into a chair, you can’t use it. If I win, you lose. Even more important: if you win, I lose. Not zero sum: if the input is digital, we can both use the same input. Digital assets are infinitely scalable, almost instantly, too.
Alliance relationships, because they have often been about raw materials in the past or distribution agreements, have often had a zero sum flavor. Alliance relationships are often fleeting as they are based on exploiting temporary conditions in the market.
Collaboration usually denotes sharing thoughts with a distinct, independent party on a project that will be jointly accredited; it is done sporadically and guardedly. Industry features a command/control structure, not a collaborative structure. You have production lines because process is often linear. Collaboration is the lifeblood of innovation because combining various points of view is crucial in creating transformative products.
Innovation is incremental, not transformative. It’s not efficient to rip up an entire factory to drastically change the flow of production based on a radical new idea. Machines are heavy. The long iron pipe inputs couldn’t be brought in that door if the milling machines were put there. Moving the milling machines would mean displacing the grinders and… you get the idea. Innovation is often transformative to a fault. Making changes to software can be labor intensive due to complexity, but they need not be. They are much less risky than tearing up a shop floor.
Transformation in thought and action is fanciful; efficiency is wisdom, not thinking up discontinuous change ideas. Transformation is a key part of the value proposition. It is often a technology start-up’s middle name.
Product life cycles are long; we amortize our investments in R&D, packaging, deals with our distribution partners, who have a certain kind of trucks (say, refrigeration at a certain temperature) that couldn’t safely transport a frozen version of the product. Therefore, we operate within physical constraints and invent new flavors instead. Product life cycles are short by definition because making significant changes is relatively easy for everyone.
Outlook: I am a powerful financier/industrialist/professor/x: the world comes to me to get done what I do. I am a technology entrepreneur. The world isn’t here. We have to create a prototype, (get funding) and get customers. We have to go to the world.
Information: is scarce, and conditions change slowly which gives information a longer shelf life. Therefore, it is a better strategy to hoard information and share it guardedly. This makes collaboration more difficult. Conditions change rapidly, and information rapidly becomes outdated. Therefore, it’s a better strategy to share information.

In the knowledge economy, inputs are mainly information and knowledge. Hence, the importance of universities and the leverage of repeat technology entrepreneurs and tech-savvy financiers, attorneys and marketers. Moving product means FTP or email. Waste? Empty the trash with no environmentalist consequences. Workers can be anywhere. Plug these differences into Ronald Coase’s economic theory around transaction costs, and you will see a gigantic difference between industrial transactions and knowledge transactions. That is why knowledge economy companies and products develop so fast; they warp our industrial economy perspective.

Transformation means profound change by definition, and people don’t like change. They need powerful, galvanizing and persistent motivation. In being more successful than Massachusetts, Silicon Valley, Austin or North Carolina during the industrial economy, Chicago is challenged to forget many of the lessons that it learned during the industrial economy. We are still too successful today to be universally motivated. Jerry Mitchell pointed out to me that the Route 128 phenomenon was born of the fact that area textiles and other manufacturing were devastated, and there was simply no alternative to taking the risks necessary to build something new. In Chicago, we have not and will never reach that point, which is a curse in the short term and a blessing in the long term. We have a diverse economy, and the industrial economy will continue to be important, although its value will continue to slip relative to the knowledge economy.

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