Richard N. Langlois

Networks and Innovation in a Modular System : Lessons from the Microcomputer and Stereo Component Industries

In this paper we examine theoretically and through case studies the phenomenon of the modular system, which we distinguish from a product conceived of as a prepackaged entity or appliance. We argue that such systems offer benefits on both the demand side and the supply side. Supply-side benefits include the potential for autonomous innovation, which is driven by the division of labor and provides the opportunity for rapid trial-and-error learning. Demand-side benefits include the ability to fine-tune the product to consumer needs and therefore blanket the product space more completely. Both of our case studies suggest that innovation in a modular system can lead to vertical and horizontal disintegration, as firms can often best appropriate the rents of innovation by opening their technology to an outside network of competing and cooperating firms. We conclude by speculating on the increased importance of modular systems in the future, since flexible manufacturing and rising incomes are likely to increase the driving requisites of modular systems: low economies of scale in assembly and sophisticated consumer tastes.

The Vanishing Hand: The Changing Dynamics of Industrial Capitalism

Alfred Chandlers portrayal of the managerial revolution of the late nineteenth and early twentieth centuries does not extend well into the late twentieth century, when widespread vertical disintegration began replacing the classical multi-unit managerial enterprise. This paper attempts to explain the new economy in a manner consistent with Chandler by providing an enlarged theoretical account of industrial evolution. In this account, clusters of Chandlerian firms appeared as a temporary episode within a larger Smithian process of the division of labor. Copyright 2003, Oxford University Press.

Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization

We argue that since Coase’s seminal 1937 paper on “The Nature of the Firm,” there has been an odd and unjustified separation between price theory and the economics of organization. For example, matters of production has been the domain of the former exclusively. However, a new approach to economic organization, here called “the capabilities approach,” that places production center-stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization.

Innovation, networks, and vertical integration☆

A central debate in industrial policy today is that between proponents of large vertically integrated firms on the one hand and advocates of networks of small specialized producers on the other. This paper argues that neither institutional structure is the universal panacea its enthusiasts claim. The menu of institutional alternatives is in fact quite large, and both firms and networks -- of which there is more than one kind -- can be successful, growth- promoting adaptations to the competitive environment. Industrial structures vary in their ability to coordinate information flows necessary for innovation and to overcome power relationships adverse to innovation. The relative desirability of the various structures, then, will depend on the nature and scope of technological change in the industry and on the effects of various product life-cycle patterns. The principal policy conclusion of this analysis is that the governments role ought to be facilitating rather than narrow and

External Economies and Economic Progress: The Case of the Microcomputer Industry

The following article provides a thorough chronicle of the microcomputer industry. That industry is a striking case, in which industrial growth took place through the creation of “external†capabilities—that is, capabilities produced by and residing in a specialized market network rather than in large organizations enjoying internal economies of scale and scope. In the microcomputer industry, the most successful products were those that took the greatest advantage—and allowed users to take the greatest advantage—of the market; and the greatest failures occurred when business enterprises bypassed the external network and attempted to rely significantly on internal capabilities.

Explaining Vertical Integration: Lessons from the American Automobile Industry

The early history of the American automobile industry provides fertile hunting grounds for theorists seeking corroboration of various, conflicting theories of vertical integration. An examination of the whole history suggests that no single theory always fits the facts perfectly. A complete explanation must combine specific theories in a way that is attentive to such factors as industry life-cycle, demand, economies of scale, and appropriability. If there is any “general†theory, it lies in the set of “dynamic†transaction-cost approaches rather than in the asset-specificity approach now dominant.

Economic Change and the Boundaries of the Firm

The study of economic change -- including technological change -- has long been a subject of fascination to economists. It is also a subject that has proven refractory to most attempts to capture it adequately. This essay is an attempt to walk a small piece of this difficult ground. Specifically, it aims to examine the problems that economic change poses for the explanation of the organization of firms. By this I mean the problem of explaining the boundaries of the firm -- explaining the extent of internal organization or vertical integration.

Knowledge, consumption, and endogenous growth

Abstract. In neoclassical theory, knowledge generates increasing returns – and therefore growth – because it is a public good that can be costlessly reused once created. In fact, however, much knowledge in the economy is actually tacit and not easily transmitted –and thus not an obvious source of increasing returns. Several writers have responded to this alarming circumstances by affirming hopefully that knowledge today is increasingly codified, general, and abstract – and increasingly less tacit. This paper disputes such a trend. But all is not lost: for knowledge does not have to be codified to be reused and therefore to generate economic growth.

Of hackers and hairdressers: Modularity and the organizational economics of open-source collaboration

Using the idea of modularity, we study the general phenomenon of open‐source collaboration, which includes such things as collective invention and open science in addition to open‐source software production. We argue that open‐source collaboration coordinates the division of labor through the exchange of effort rather than of products: suppliers of effort self‐identify in the same way as suppliers of products in a market rather than accepting assignments like employees in a firm. We suggest that open‐source software (and other) projects are neither bazaars nor cathedrals, but hybrids manifesting both voluntary production and conscious planning.

Orders and Organizations: Toward an Austrian Theory of Social Institutions

That the Austrian school of economics is and has been fundamentally concerned with the theory of social institutions is a proposition gaining wide acceptance today by critics of this school as well as by its adherents. This is a rather striking development. Not too many years ago, the prevailing wisdom was that the American Institutionalist school (of Thorstein Veblen, John R. Commons, and Wesley C. Mitchell) was the sole repository of thinking about social institutions and that, moreover, Institutionalist approaches and beliefs were strongly at odds with everything Austrian. 1 But a recent spate of articles, including a couple of symposia in the journals, has highlighted the Austrian approach to institutions and brought it into contact albeit sometimes violent contact with the Institutionalist school (Boettke, 1989;Hodgson, 1989;Langlois, 1989;Perlman, 1986;Rutherford, 1989a;Rutherford, 1989b;Samuels, 1989;Vanberg, 1989).