The DNA of Enterprise: Jane Jacobs and Henry George on Innovation and Development Through Spin‐Offs

• Date: 01 May 2015
• Published date: 01 May 2015
• Author: David Ellerman
• DOI: http://doi.org/10.1111/ajes.12104

The DNA of Enterprise: Jane Jacobs and

Henry George on Innovation and

Development Through Spin-Offs

By DAVID ELLERMAN*

ABSTRACT. The main training grounds for entrepreneurial, technical,

and business capacities are existing businesses. There are two ways

that this training can lead to new growth—just as there are two ways

that existing biological DNA can lead to the growth of bio-mass,

namely, (1) existing organisms getting bigger or (2) by spinning out

offspring who in turn can spin out more offspring. Where growth has

been vibrant, e.g., Silicon Valley, it has followed the second route,

growth by offspring. This is also the biological principle of plenitude.

Conventional ownership structures lessen the incentives for spin-offs

since managers do not wantto reduce the “empire” under their control.

The biological principle of plenitude is best implemented with

employee-owned or cooperative firms (e.g., as in the Mondragon

cooperative group). Inspired by ideas first proposed by Henry George

and Jane Jacobs, this article explores the social benefits of applying the

biological principle of plenitude by encouraging the proliferation of

enterprises. Thisposes a conundrum for societies organized around the

private business model: How can the social benefits of spin-offs be

realized when managers do not have an incentive to foster new

businesses? We conclude with ways to address this problem.

Introduction: The Social Roots of Business Innovation

Nature abhors a vacuum, and economic development is no exception.

Nothing comes from nothing. New businesses build on old businesses,

and new ideas derive from old ones. The central question of economic

development should therefore be: How can we create the conditions

under which a city and a region form a vast learning network, in which

*University of California at Riverside, 4044 Mt. Vernon Ave., Riverside, CA 92507

USA. david@ellerman.org. www.ellerman.org

American Journal of Economics and Sociology, Vol. 74, No. 3 (May, 2015).

DOI: 10.1111/ajes.12104

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C2015 The American Journal of Economics and Sociology, Inc.

ideas and personnel from one business can influence the development

of new enterprises in an ongoing process that intensifies the network

and makes it more productive?

Standard microeconomic theory, as represented in college textbooks,

provides no clues about this process or about the true nature of enter-

prises. Micro theory treats each business as a unit that transforms labor

and raw materials into a finished product or service and then sells it.

There is no basis for seeing in that description how the behavior of

businesses enables an economy to grow. Yet growth does occur, and it

arises from humble beginnings that can be discovered by paying close

attention to how businesses function, interact, and split off new units in

processes that are verysimilar to biological ones.

Two thinkers, Henry George and Jane Jacobs, separated by almost a

century, offered ways of thinking about business enterprises that relied

on organic metaphors that are quite at odds with the mechanistic meta-

phors normally encountered in economics texts. To see how their ideas

relate to modern business and theprocess of innovation, let us turn first

to the question of how firms both replicate themselves and transform

themselves in response to changing conditions.

Internal Knowledge: External Benefits

Every company has two outputs: its product and itself. By “itself” is

meant the company as an organization of people trained in the systems

necessary to run the business and in the technologies necessary to pro-

duce the products or services of the company. While some skills are

already possessed by people when they join the organization, the com-

pany still has to have the training capacity to specialize those skills to

the systems and technologies specific to the firm. In addition, as people

leave or retire, the company has to recreate those human capabilities

within the firm.

While the company’s ordinary products may be protected by patents

and trademarks, there is generally no such exclusive rights over the

human capabilities developed in the company. When those capabilities

leave the company, then it is a positive externality—a benefit to society

not counted as such in any accounts. In A. C. Pigou’s ([1920] 1932: 204)

classic book on normative economics, he noted that the businesses in a

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