Small Is Innovative

This post by Patri Friedman is part of Secession Week 2010: The Size of Nations.

In my post yesterday comparing the early American state to a startup, I talked about how some of the benefit of a new country with a new political system is to serve as a test of that system. Continuing with the government as a business metaphor will help us to understand why we get so little innovation today.

While the largest R&D budgets are of course in large firms, such as pharmaceutical companies and tech giants like Apple, those firms tend to introduce incremental innovations, rather than truly disruptive technologies. Apple’s iPod, iPhone, and iPad have been wildly popular – but they were preceded by portable MP3 players, smartphones, and tablet devices made by smaller companies.

Nor is this surprising. The larger a firm, the greater the bureaucracy and the more conservative it tends to be. A large firm wants to protect its market position, and with large pre-existing revenues, its employees are naturally more motivated to compete for access to those existing revenues, rather than creating new ones. There is more rent-seeking and less creation. One of the many reasons for this is that in a large firm, it is harder to identify who has created the value, thus the rewards of success are spread throughout the company, thus value creation is more of a public good problem and individual innovators are not incented.

It’s a simple pattern, and it’s why people work longer hours at startups, and why companies that massively scale have trouble holding onto their entrepreneurs. I was at Google from 2004 to 2008, a period during which it grew about 6-fold. While Google had many programs designed to appeal to the more entrepreneurial, startup-ey “old-timers”, and did its best to create an environment which would be as attractive as possible, there was a steady stream of people who left the company. And not just to retire – many are now involved in smaller companies.

In the history of the world, radical innovations have almost always come from small groups starting with small experiments. The smaller the experiment, the more things you can try, and thus the better you can explore the space of possibilities. Furthermore, small groups tend to be beholden to few interests, and so they can explore disruptive possibilities which a large group would be averse to, for fear of offending one of their stakeholders.

Which brings us to the world of government. There are many reasons why governments aren’t very innovative, but one of them is surely its large size. There are only two countries smaller than 1,000 people, and 7 smaller than 10,000 people. While startup countries will likely be larger than startup tech companies – after all, the business of government is about interactions between individuals – I believe that a new country of hundreds or thousands of people could try a far more innovative political system than one could ever convince a country of millions or tens of millions to try. Just like any other startup, these startup countries will rarely stay their starting size – they’ll either grow by attracting customers, or go bust, freeing up resources for new experiments. But small is the best way to start any experiment.