THE ENTREPRENEURIAL MULTIPLIER
Louis Galambos and Franco Amatori
The authors of this paper are studying entrepreneurship because we believe that innovation is the central dynamic of capitalism; that it is responsible over the long-term for the economic expansion of the system; that it is the primary source of the system’s opportunities as well as its instability; that it inevitably produces an unequal distribution of income and wealth; and that it also occasions the expansion in all democratic societies of public sector efforts to achieve more stable and equitable systems. These efforts clash over the long-term with an entrepreneurial economy, culture and politics that stress innovation and economic efficiency. The struggles between these two visions of the good society continue today – with different results — in every society that experiences modern economic development.
Our approach to a subject that many economists avoid, nevertheless draws upon economics for its central concept.i Since the Keynesian revolution in economics, a standard part of the profession’s analytical framework and a forceful argument for government support for investment has been the multiplier concept. The multiplier has helped generations of students understand why additional investments can, through re-spending, have a greater impact on national income than the amount of the investments. If a society’s multiplier is three, for instance, the national income will be increased by a factor of three when government spending or a new technology prompts investment. The re-spending and thus the multiplier works through consumption in an equilibrium model.ii
Our contention is that there is also an Entrepreneurial Multiplier that works directly through investment by forcing or incentivizing new investments in innovation in a dynamic, disequilibrium model. These investments have been researched and analyzed in various contexts without synthesizing them as a multiplier.iii Thus, historians of public as well as private entrepreneurship have described and discussed “spill-overs.”iv Similarly, historians of technology have found many examples of “bottlenecks” produced by successful innovators; the bottlenecks raised the premium on further technical advances in a particular industry.v Joseph A. Schumpeter, the father of modern entrepreneurial studies, emphasized emulation of the entrepreneur as a source of growth and competition as high entrepreneurial profits attracted competitors and drove economies ahead in great surges.vi
The general concept of an Entrepreneurial Multiplier unifies these several approaches to innovation and enables us to bring together the two types of entrepreneurship most common in recent work in economics, business and economic history, and managerial studies. One branch involves startups, all of which are generally considered entrepreneurial; the other focuses on entrepreneurship within existing firms, which frequently are large, complex, and bureaucratic. To facilitate that synthesis, we will divide entrepreneurial action into three categories; like hurricanes they can be evaluated on the basis of their impact on the economy and society.
Category 1: We consider all startup firms to be inherently entrepreneurial even though they seldom have a widespread impact on the national, regional, and often not even on the local economy; nor, until they develop further are they likely to launch a sequence of additional acts of entrepreneurship. In toto, a series of these seemingly insignificant innovations can have a significant impact upon the local economy and also upon the society’s culture and politics in ways that favor entrepreneurship over the long-term. The heart of the Entrepreneurial Multiplier is the sequence of innovations and startup firms are more likely to be a response to other innovations than the source of an additional entrepreneurial sequence. Most startups fail within a few years. As the successful startup matures, however, its capacity to promote further entrepreneurial activity can increase sharply; it then blends into our second category. As you can see, the sequence of innovations is the key aspect of this analysis: the sequence or series of innovations is what is being multiplied.
Category 2: Entrepreneurship at this level includes most innovation that takes place within firms, innovation that for instance improves processes and enhances a business’s competitive position without necessarily creating new markets or upsetting an industry’s basic structure. This category of entrepreneurship can, however, prompt the creation of new Category 1 businesses – starting a short entrepreneurial sequence — and can create the competitive pressure that prompts larger, well-established firms to innovate or exit the market in the manner described by Clayton M. Christensen in The Innovator’s Dilemma and Andy Grove in Only the Paranoid Survive.vii These sequences — and all of the others we describe — thus inherently and importantly are characterized by numerous failures as well as successes.
Category 3: Entrepreneurship at this level involves the type of innovation that reaches across industries, sectors, regions and nations and brings about dramatic changes in all three of our categories.viii This type of innovation has been related to and studied as a “general purpose technology,” such as the water- or steam-powered, factory-based machinery of the first industrial revolution. Because of the multiple sequences it launches, these innovations have significant economic effects that are likely to show up in national income accounting. We do not limit our analysis to technological innovations, but they have clearly been the most dramatic sources of entrepreneurial sequences in the developed nations since the late eighteenth century. These innovations are frequently associated with the social, cultural and political ramifications we label as an industrial revolution. These innovations cause the type of structural changes Joseph A. Schumpeter labeled “creative destruction:” organizations and individuals unable to adjust to entrepreneurial competition fail unless they can be shielded publically or privately from competition. The sequences of entrepreneurship in Category 3 will be very long and the impact on the economy very significant. The path of the sequences resembles a tree, rather than a single, linear trace.
THE FIRST INDUSTRIAL REVOLUTION
For illustrations of the Entrepreneurial Multiplier at work, we can look to the familiar ground of the first industrial revolution. In cotton textiles during the late eighteenth and early nineteenth centuries, the first major innovation involved the application of water-powered machines to the spinning of thread; this early development of the factory movement prompted British entrepreneurs to develop new water-powered looms to weave the cloth.ix While the British government tried to prevent other nations from stealing the central ideas of the factory movement, Samuel Slater learned the secrets of the factory production of cotton yarn, immigrated to America, and put the ideas into practice in a mill in Pawtucket, Rhode Island, in the early 1790s.x The Entrepreneurial Multiplier has seldom respected national frontiers, lending to innovation a transnational dimension long before the British Parliament looked to free trade rather than mercantilism as a national policy. Slater’s success attracted a wave of imitators, à la Schumpeter, as “cotton mill fever” hit New England. These entrepreneurial sequences were important to New England and to the entire American economy of that era. Soon, there were hundreds of new businesses making cotton yarn and the industry continued to expand and change.
Some of the most important changes were introduced by firms like the Boston Manufacturing Company (BMC), which produced both yarn and cloth in Waltham, Massachusetts. Water-powered weaving as well as spinning gave the new enterprise an advantage over its American competitors. Unlike most of the young firms in the industry, the Boston Manufacturing Company was unusually successful in the years immediately following 1815, when competition from Britain cut into U.S. markets. The firm’s sales increased from slightly under $2,000 that year to $345,000 by 1822. By the following year, the firm’s assets were up nearly twenty-fold over the first year of operations. Profitable in good times and bad, the BMC was a model entrepreneurial firm.
Our interest here, however, is the other entrepreneurial ventures – large and small, Category 1 and 2 – that did not attract much attention at the time and have often not been able to win a place in our general economic and business histories: some of them were the retail and wholesale businesses that serviced the mill workers, handled the products of the mills, and that provided special services to firms like the Boston Manufacturing Company.xi That famous mill innovated in labor relations by employing “mill girls,” who were housed in dorms and paid in cash. Between 1810 and 1820, Waltham’s population increased by 65% and new stores were attracted by the cash flowing into the local economy.xii In 1820, the local economy was also strengthened when the Boston Associates established the Waltham Bleachery and Dye Works, a company that would remain in business for 131 years.xiii Another ancillary business was the Newton Chemical Company, which was led by one of the founders of the Boston Manufacturing Company.xiv BMC was either directly or indirectly responsible for the development of these new Category 1 and 2 enterprises, all of which strengthened the local and regional economy, fostered a culture friendly to innovation, and nurtured a political environment conducive to entrepreneurship.
Important as these businesses were to Waltham’s growth, our major interest here is in the early development of the machine-tool industry, a sequence that would have long-term implications for the national economy. Cotton textile producers needed machines – at first wood and then metal – and most of them initially built their own in rudimentary machine shops on site. Individual craftsmen began to build equipment and then created firms to supply the rapidly expanding industry. Luther Metcalf of Medway, Massachusetts, a cabinet-maker and later retailer of “spirituous lyquors,” was typical of the lot.xv He caught the “cotton-mill fever” and then founded a machinery business, which supplied the spinning machines and related equipment to the Boston Manufacturing Company as it got started in business in 1814.xvi BMC went on to build its own water-powered looms and to finance a well-equipped, basement machine shop. As BMC got fully into operation, the firm began to look for additional work for the machine shop. In 1817, it started to provide machinery for other mills, and within a few years, this was a profitable business. Under Paul Moody’s direction, the machine shop was able to draw upon the resources of the Boston area, including its iron foundries and other machine shops.xvii In the meantime, it became a training ground for future mechanics – much as Slater’s mill had been in previous decades and much as the railroad shops would be in the future.xviii
The BMC machine shop became a potent source of innovations in textile production and in other branches of the economy. Fortunately for students and historians, George Sweet Gibb studied this history in detail and we can draw upon his account – as well as Thomas Navin’s book on the Whitin Machine Works – for more information on how the Entrepreneurial Multiplier worked in those years.xix Between 1814 and 1824, the BMC’s shop matured into a leading source of machinery for one of the fastest growing industries in the United States. Improvements in the machinery – the type of process innovations that characterize Category 2 and 3 firms – gradually increased the productivity of the BMC mills.xx
The mills and machinery businesses were so successful between 1821 and 1824 that the Boston leaders of the enterprise looked to the Merrimack River and Lowell, Massachusetts, for a new and larger opportunity to expand their mills and their machinery enterprise.xxi Successful in the new site, the machine shop was employing almost 300 men by 1835.xxii New mills and a thriving machine shop brought a sharp increase in population in Lowell and in new Category 1 businesses.xxiii By 1832, a complex, local economy had replaced the farm land along the Merrimack.
In a manner that would later be incorporated in business-cycle theory, however, the cotton-mill business inevitably leveled off and then declined after the Lowell mills were built.xxiv
By the time that happened, the machine shops were already developing new capabilities that would sustain a profitable business and foster entirely new sequences. One of their special talents was in the use of water power and the transmission of energy to a manufacturing operation. Major changes were taking place in the efficiency of water wheels and the shop developed new skills in using water turbines. Now organized as one part of the Locks and Canals Company, the shops had – as their name indicates – also become significant contributors to the engineering of canals and their locks. In 1834, they moved into another major field when they took on locomotive construction for a new steam line, the Boston and Lowell Railroad. Drawing upon British models, the shop turned locomotives into a large part of its business. By 1838, it was the third largest producer in the country and had 32 locomotives in operation, most of them in New England.xxv By this time – despite the depression that had begun the previous year – the machine shops were important contributors to three of the essential elements of American industrialization and economic growth: manufacturing; canal transportation, and the railroad.
Like the mills, the shops were contributing to additional entrepreneurial sequences on the local level, especially in Lowell, Massachusetts, a new urban center. The new enterprises included thirty-four boarding houses, bakers, bars, hardware stores, a bank, dress makers, a hotel, a shoe store, a livery stable, etc., etc.xxvi None of these tiny enterprises were economically significant above the local level, but their combined effect was to create an entrepreneurial culture attuned to market relationships and the transitions fostered by innovation.xxvii Insofar as they were successful, these micro-entrepreneurs enjoyed the positive, material sanctions that gave heft, political resonance, and lasting power to that culture. The enterprisers who started these little businesses needed to look no further than their own experiences to understand the creative side of “creative destruction.”
Where do these entrepreneurial undertakings belong in history? Schumpeter ignored them, as do most economic and business historians. The late Alfred D. Chandler – long the world’s premier business historian — focused scholarly attention on the largest, most profitable businesses of the nineteenth and twentieth centuries. The Chandler paradigm certainly helps us understand some of the most dynamic institutions of the first and second industrial revolutions. But what neither Chandler’s nor Schumpeter’s history provides is a grasp of the broad, ideological and cultural impact of industrialization. Looked at individually, the network of new Category 1 enterprises in Lowell and elsewhere were of vital importance only to the men and women who started the businesses and to their customers. Looked at collectively, they were important to the local, state, and regional society because they helped to shape and sustain the distinctive economy, culture and politics of early nineteenth-century Massachusetts. Collectively, they strengthened what Max Weber called “the spirit of capitalism.”xxviii
The culture of entrepreneurship was embedded within a broader culture that favored social, geographical, and economic mobility as well as innovation. That very diffuse set of values helped Americans deal with the fact that most entrepreneurial ventures fail and most of the successful ones appear to become less innovative over the long-run. The entrepreneurial culture allowed the society to handle conflicting experiences: subsidies to enterprises and the myth of the self-made man, for instance; cooperation and competition, for another; and there were many more, including of course slavery and democracy. The culture of innovation was durable but not impenetrable. It was wide-spread in early America, but certainly not universal.
Not everyone benefitted from the impressive record of the Entrepreneurial Multiplier at work, and of course those who did benefit received very unequal shares of the income and wealth being generated by the Boston Manufacturing Company, the mills in Lowell, and the machine shops in Waltham and Lowell. Investors who caught the “cotton-mill fever” propelled the industry ahead in surges that were always followed by depressions that brought down employment and income in the working class.xxix While the budding machine-tool industry was less vulnerable after it diversified its product line, it too experienced sharp fluctuations that brought cuts in employment on the shop floor. Businessmen of that era would have thought it strange to contemplate any other arrangement or questions about the unequal distribution of misery. There were, nevertheless, questions raised in 1819, when the mill girls went on strike over a wage cut.xxx But the recovery that followed and the influx of immigrants looking for factory wages soon erased or suppressed the immediate social discontent over the insecurity of industrial work. So too with the routine use of the blacklist to prevent discontented employees from moving from one job to another.
For much of the nineteenth century, these conditions would continue, creating a counterpoint to the entrepreneurial culture and ultimately to the politics of capitalism. The tension between these cultures and their associated ideologies would become a central issue in the politics of America and all of the other industrializing nations. The resolutions would produce the “varieties of capitalism,” which were in reality the varieties of the political half of political economy.xxxi For many decades, however, America’s unfolding economic opportunities and mobility would trump the desire for social and political change in what was the world’s fastest growing industrial economy.
Political change was particularly difficult to achieve in a society in which the new industrialists and the established commercial class had so much power. That control was reflected in the ease with which the Boston Associates were able to get state charters passed for their new enterprises. Incorporation had previously been used largely for infrastructure improvements in which the social interest loomed very large. Bridges and piers were advantageous to the many, not just a small coterie of businessmen. But a charter or the tariff protection won in 1816 was another thing entirely. The social benefits were indirect and in the future; the economic return was direct and of overwhelming benefit to the industry’s investors. A glimmer of the balance of power could be seen when the state authorized the railroad from Boston to Fitchburg: the BMC investors’ agent specified the exact route of the line when it passed through Waltham.xxxii
There were thus political grumblings and caveats about the mills and machine shops, but none of these interrupted the flow of profits and dividends from the operations of the shops at Lowell. The company had land and water power to sell, as well as growing markets for its textile machines and locomotives. The entrepreneurial sequence in machine tools appears to have provided the major source of income to the Locks and Canals firm, even during the deep downturn after the Panic of 1837. When the machine-tool operations were finally sold in 1845, the company’s founders could reflect on its contributions to the region’s economic advances: the solid establishment of a successful regional cotton-textile industry; the expansion of Waltham’s local economy and the creation ab ovo of the city of Lowell; and the manufacture of many of the locomotives for a growing rail network in New England.
More difficult to total are the social and political outcomes from this sequence: the balance sheet in this case clearly included liabilities as well as assets. There were surges of socio-economic discontent with each economic downturn and the depressions appeared to be getting longer and deeper. They produced periodic efforts to find some means of ensuring a greater measure of economic security for the working classes and some glimmers of an anti-capitalist movement that would continue to develop with each downturn of the business cycle. As these problems became more severe, it would get harder to drown out the voices calling for change. But as the nation’s transportation and communication improvements continued and growth in the manufacturing and service sectors carried America into a second industrial revolution, the culture and polity were still primarily amenable to change and supportive of entrepreneurship.
THE SECOND INDUSTRIAL REVOLUTION
In the latter half of the nineteenth century, a distinctive new wave of innovation transformed America and the other developed economies. Changes in transportation and communications opened new national and international markets. New electrical, chemical and electro-chemical industries arose, as did giant firms attuned to the growing markets and the opportunities for mass-production and mass-distribution of standardized goods and services.xxxiii Urbanization fostered further specialization, much as Adam Smith had predicted. Growth across a broad front in America and Europe spawned increasingly complex and elongated sequences of entrepreneurship.xxxiv
One of the new industries was aluminum. Like cotton-textiles in the first industrial revolution, aluminum was a major innovation that launched numerous entrepreneurial sequences in the years following its introduction as a commercial product in the United States and France.xxxv Charles Martin Hall discovered his new and inexpensive way to recover the metal in 1886, and two years later, he and a team of American investors founded The Pittsburgh Reduction Company.xxxvi Unlike the BMC, the aluminum venture did not start with adequate, commercially generated financial resources. The “Three Fs” (family, friends, and fools) did not provide Hall and his partner, Alfred E. Hunt, a metallurgist, with the capital they needed, but they were able to interest three Pittsburgh businessmen and a local chemist in their new company.xxxvii The firm started with $20,000. Additional financing came from other local businessmen, including the Mellon brothers, well-to-do Pittsburgh bankers who had acquired substantial capital by investing in local real estate.xxxviii
After fighting off two patent challenges and settling out of court after a third decision, the new firm solved a series of technical problems and invested and reinvested enough capital to make the company a profitable mass-production enterprise with tightly controlled markets. Renamed the Aluminum Company of America (Alcoa) in 1907, the firm was by the end of World War I, a large and successful producer of a metal that had been transformed from a laboratory curiosity to an industrial product with substantial potential for further development.xxxix
As this new industrial firm emerged, it soon began to foster additional entrepreneurial sequences in both Category 1 and Category 2 ventures, much as the Boston Manufacturing Company (BMC) had in the early 19th century. Seeking space for expansion, the aluminum company also followed the BMC model by creating a town at New Kensington, Pennsylvania, on the Allegheny River to the north of Pittsburgh. New sequences of innovation in and near that location followed quickly: in addition to the usual retail establishments, there was a new Braeburn Alloy Steel company.xl The search for new applications for aluminum reached out to Wisconsin, where there were several aluminum cookware firms; to Ohio, where there was a new aluminum sign-lettering business; and also in the Midwest, to Illinois, where there was a new Illinois Pure Aluminum Company.xli Many of the early ventures in aluminum products failed – as many startups did and still do – but the enthusiasm for the potential of a metal that was lighter than steel and a good conductor of heat and electricity did not wane.
As the Pittsburgh Reduction Company expanded output and lowered costs and prices, the business sought additional production sites. The next big move was to Niagara Falls, where cheap electricity was the attraction. Shortly, there was a second plant at Niagara Falls and then a third, as well as a plant at Massena, New York.xlii The Tennessee River was next, and here the firm, now Alcoa, established dams, power plants, and smelters and founded the town of Alcoa, Tennessee. Upstream vertical integration into bauxite, the firm’s major raw material, took the business further westward to another new town, Bauxite, Arkansas.xliii The ore from Arkansas was refined into “alumina” in another new plant in East St. Louis, Illinois.xliv
Through its early history, the enterprise was protected by its patents, by a stiff tariff on imported aluminum, and by its membership in an international cartel that left the U.S. market to Alcoa’s control. At the end of World War I, Alcoa was the sole producer in America of aluminum ingots. Without acquiring significant scientific prowess, the firm had nevertheless steadily improved its production processes and achieved the greater efficiency and lower costs that further buttressed its monopoly position. Alcoa’s Category 2 process improvements were more accomplishments of good engineering than of good science.
As this suggests, the firm – again, like the Boston Manufacturing Company – had substantial power to shape its environment. It had fiercely resisted unionization of its plants. In the legal and political environment of that era, it had no real difficulty in establishing its particular combination of a holding company and an operating company structure. It exercised near absolute authority in its company towns.
Like other prominent monopolists and oligopolists in America during the second industrial revolution, however, Alcoa’s relations with the federal government were unstable. A surge of agrarian unrest and a progressive reform movement created demands for more active governments at the local, state, and federal levels in America. As a new regulatory administrative state took hold, the political environment for entrepreneurship became more complex and demanding; new questions were asked of business and new constraints imposed on business behavior. The federal and state antitrust laws properly reflected the attitudes of many Americans toward large concentrations of economic power. The public had become suspicious of the so-called “trusts” without being particularly attracted to radical ideologies that looked to the demise of big business and the capitalist system.xlv In 1911, the U.S. Department of Justice issued an antitrust complaint against Alcoa, but the firm’s leaders were not interested in fighting national authority. They quickly reached an agreement with the government, signed a consent decree, and protected their monopoly.xlvi
Meanwhile, Alcoa’s contributions to the entrepreneurial multiplier across a wide expanse of America was fostering innovation in a new basic metal, feeding the American hunger for material progress, modulating the fear of “creative destruction,” and building a new series of great fortunes that further exacerbated the nation’s skewed distribution of income, wealth, and power. The firm’s environmental footprint would eventually prompt political responses, but in these early years of the second industrial revolution, there was far more interest in the nation’s rise to global industrial leadership than there was in the rise of industrial pollutants. Soon, however, that too would change, and local, state, federal power would be exercised in an effort to protect the environment.xlvii
While the progressive reform movement challenged entrepreneurial authority on several fronts, the culture and politics of innovation were actually bolstered in this same era by the rise of the professions in urban America. The professions were themselves sites of transformation. All of them lauded change and developed social systems that rewarded creativity. Science and engineering in America were transformed, as were the institutions of higher education that provided professional training and began to generate research. Although the United States at first lagged far behind Germany in developing university-based technical research, American schools began to close the gap in the twentieth century and then to surge ahead in many fields after World War II.
Alcoa took advantage of this surge in science and engineering to improve its production processes and to develop new uses for aluminum.xlviii Like most American manufacturing firms, it first tried to use consultants instead of developing in-house technical capabilities. But the company needed its own technicians just to deal effectively with consultants. Shortly, Alcoa started to build its own staff, first with engineers. Next came chemists and metallugists. Soon Alcoa had a central laboratory capable of generating new products and processes and also able to guide the business of buying innovations. This task became all the more important after the company’s patents expired in 1909. Following World War I, Alcoa’s Technical Department became a major source of new products, improved processes, and fundamental research. It also became a source of the new Category 1 and 2 firms that were using aluminum to make everything from airplanes to automobile parts, from window castings to cooking ware and aluminum foil.xlix
THE THIRD INDUSTRIAL REVOLUTION
In the years following the Second World War, the Category 3 entrepreneur in telephony, the Bell System, developed the innovation that would launch a third industrial revolution. The Bell System’s switching innovation, the transistor, set in motion the single most far-reaching entrepreneurial sequence in modern history.l The digital revolution can be traced from the transistor, to the integrated circuit, to the internet and to a multitude of related innovations that are still remaking societies worldwide today.li The Entrepreneurial Multiplier in this case is very long, very complex and continuing to grow. The path of these sequences – charted by numerous historians and economists – is certainly tree-like. In manufacturing, distribution, and financial services, new Category 2, and 3 enterprises continue to develop in the wake of the digital transformation. So too do smaller retail firms (Category 1), down to the level of the internet cafes. Even in some of the poorest and least developed societies in the world, wireless communications and the internet are changing the way people communicate, carry on economic activity, and engage with the world outside of their families, communities, and nations.lii
This recent burst of innovation has had important cultural and political, as well as economic, effects on the United States. In the aftermath of the New Deal of the 1930s and the wartime expansion of government controls in the 1940s, it appeared to Schumpeter and other sagacious intellectuals that the drift toward socialism and away from market-oriented capitalism and the entrepreneurial culture was inevitable.liii America’s European allies were headed down that path in the aftermath of the war. But then a formidable political and intellectual “re-formation” in America revived entrepreneurial values and again transformed the nation’s political setting.liv That setting continued to be characterized by formidable tensions between those in quest of equity and economic security and those Americans who emphasized the search for efficiency and for what Michael Lewis memorably labeled “the new new thing.” The digital revolution decisively reinforced with new opportunities, profits, jobs, services and goods an entrepreneurial culture which had survived the Great Depression of the 1930s and had now begun to play a larger role in the United States and the global economy.
It is beyond our capabilities to follow the millions of digital sequences from the initial innovation at Bell Labs to the more recent entrepreneurial experiences in the United States, Asia, Latin America, and Europe. Others have tracked some but not all of these major sequences, as indicated in the materials cited in our endnotes. Instead, we will leap over the multitude of sequences stemming from the transistor and look at one sequence, a very recent development we believe provides a good illustration of what has happened and is continuing to happen in the information age. We will briefly examine 3D printing, an innovation that could well become a general purpose technology and is today continuing to evolve in the United States, in Asia, and in several countries in Europe, including Italy. As we do so, we are jumping into Wiki-History Land, where the factual base is skin-thin and the perspective stunted. Applying a media discount of 50%, we can at least chart some of the outlines of this sequence.
Those who have not been following 3D printing in the press and other publications can turn to Chris Anderson’s recent book, Makers: The New Industrial Revolution, for a simple, non-technical explanation of the technology.lv As Anderson aptly observes, you can start by thinking about the laser jet printer that you probably use in your home or office. That machine is a two-dimensional printer. You put computer instructions in the printer, and it applies ink to the page as instructed. Your letter, chapter, or lecture comes out (one hopes) in finished form. Now imagine that you add a third dimension to the instructions and the machine extrudes plastic or metal instead of ink. You now have a 3D Printer. This is also called “additive manufacturing.” These machines are currently available in a variety of sizes, forms, and capabilities.
The original machine, invented and patented by Charles W. “Chuck” Hull in 1986, used an ultraviolet light beam to harden a light-sensitive liquid as it was applied, layer by layer, to make the product specified by the software. Hull founded 3D Systems to produce the machines and today it is one of the two largest companies in the industry.lvi There are now various different techniques for shaping either plastic or metal (laser sintering and laser melting, for example) and all have taken computer assisted design (CAD) and computer assisted manufacturing (CAM) to a new level in which the printer actually makes the object you want to produce. It makes them one at a time. It makes them just as complex as your software design is. Some of the printers build up the object, layer by layer, from the plastic or metal they extrude. Others cut the object from the material. If you don’t want to develop software instructions, you can put the object you want to copy in a 3D scanner that will produce the instructions you need.
Where is 3D printing being used? One of its most important uses is in producing prototypes for further development in other forms of manufacturing. It is also being used in making dental products, medical devices, architectural models, electrical circuits, and the tools and molds used in mass-production. To those who see manufacturing moving away from standardized products toward personalized, individualized products, 3D has great appeal. In its current form it favors customization, but that too may change with further technical development. New firms are entering the industry, including General Electric (GE), which now has a “Rapid Prototyping Center.” By 2020, GE plans to be producing more than 100,000 aviation parts using 3D Printing.lvii Even after discounting for the standard hype, it is significant that firms like GE and Hewlett Packard (HP) have moved into the industry. HP announced (October 2014) that it would soon have available a 3D industrial printer that it claimed could cut costs by fifty percent while working ten times faster than existing machines.lviii Like the early textile industry, 3D printing has produced a new system of manufacturing and a new machine-tool industry with substantial capabilities for further entrepreneurial development. There is currently interest in creating machines large enough to produce 3D automobiles.
As befits a relatively new industry in a new digital age in a very large, capital-rich environment, funding for 3D entrepreneurial ventures has taken on new forms.lix In addition to the traditional forms of funding entrepreneurship – mortgages, credit cards, the 3 Fs, and the post-WWII venture capital companies – businesses making 3D printers have turned to campaigns of so-called “crowdfunding.” This is a way of using the internet to collect small amounts of capital from a relatively large number of people who do not know each other. One of the “platforms” for crowdfunding is Kickstarter, which has been in business in the United States since 2009. Forty-one producers of 3D printers have gathered pledges of $18 million through Kickstarter and the amount of capital raised in this way is continuing to grow. Large firms such as GE and HP can depend on internal financing, but the startup producers have turned with some success to public campaigns to promote their innovations.lx
Will 3D Printing be a disruptive technology, à la Clayton Christensen?lxi According to Lyndsey Gilpin, writing in TechRepublic, 3D will have a revolutionary impact on manufacturing in electronics, automobiles, jewelry, and military equipment, on medicine, and on many other aspects of production in the developed and the developing worlds. McKinsey Global Institute predicts that it will be a major factor in the global economy by 2025.lxii The global market for printers and services has been estimated at $2.2 billion in 2012 (the growth rate was 29% over the previous year).lxiii In a report entitled The Search for Creative Destruction, investment firm Goldman Sachs focuses on three transforming technologies: big data solutions; software-defined networking; and 3D printing, which “is expected to continue on its path of rapid acceleration.”lxiv Projections vary, but the historical trend for the years 2007-2011 is impressive: there were 66 3D printers sold in 2007 and 23,265 sold in the latter year, a 35,000% increase.lxv
Recent developments in bioengineering are especially interesting. As Professor Jerome Groopman observed in a recent issue of the The New Yorker, cell biologists using 3D printing are making steady progress toward the goal of printing functional body parts that can be used to replace failing organs.lxvi Researchers at Cornell University have already printed aortic heart valve conduits, and the Wake Forest Institute for Regenerative Medicine has implanted lab-grown bladders in patients.lxvii Work is currently being done to develop human tissue that could be used by pharmaceutical companies to cut the costs of safety and clinical tests for new drugs.lxviii Patenting has been vigorous in this field, and there are currently a number of relatively new companies exploring commercial applications. They include Materialise, a Belgian firm with offices around the world, EnvisionTEC, 3D Printsmith, and Organovo Holdings, Inc., which is listed on the New York Stock Exchange and recently raised $24.7 million in equity.
As Steven Leckart reported in 2013, Organovo was now able to print liver tissue. “Three factors,” he said, “are driving the trend: more sophisticated printers, advances in regenerative medicine, and refined CAD software. To print the liver tissue at Organovo,” Leckart said, “Vivian Gorgen, a 25-year-old systems engineer, simply had to click ‘run program’ with a mouse.” That product leaves Organovo a long way from making a fully functioning organ, but it is an astonishing step forward.lxix
The extended, incredibly varied entrepreneurial sequences leading to these developments in bioengineering and the millions of other similar innovations in the third industrial revolution were taking place in a political and cultural environment that recently appeared to be loaded against the entrepreneur. A mature regulatory state scrutinized many forms of business behavior that had one hundred years ago been free of political control. A very active federal government and a very active array of non-governmental organizations now have available vast amounts of information on the economy and the actions of particular businesses and individuals. There is a mounting interest in squeezing risk out of the American brand of capitalism.lxx Class action lawsuits, scrutiny by environmental organizations, and an aggressive media impinge on private sector decisions that had once been easy to make on the basis of economic factors alone.lxxi Entrepreneurial profits were no longer unquestioned. An American society nervous about the distribution of income and wealth seems on the surface less concerned about the opportunity to build wealth by developing new products and services, new sources of raw materials, new markets, and new styles of organization.
And yet, the rise of 3D printing and, indeed, the entire digital revolution indicate that entrepreneurship has not been choked off by a hostile culture and polity — the Wall Street Journal’s litany of laments notwithstanding.lxxii To the contrary, the adaptable entrepreneurs of 3D printing and all of the other digital innovations seem to be just as enthusiastic about change as were the early nineteenth-century founders of cotton-textile mills and machinery firms and the inventors and investors who built up the aluminum business in the early twentieth century. In the United States the incentives for entrepreneurship – an inherently risky undertaking in finance and industry – still apparently outweigh a cultural, media, and political environment increasingly focused on reducing risk in the aftermath of the Great Recession of 2008-2014.lxxiii
CONCLUSION: SO WHAT?
By focusing on three industrial revolutions, we have stressed technological, rather than institutional change and emphasized endogenous rather than exogenous factors in shaping the development of American capitalism.lxxiv Not all of the major innovations since the late eighteenth century have been technological. Changes in the organization of firms (the unitary-form, the multidivisional-form, for instance; and later the network-form of business) encouraged innovation in many sectors of the industrial economy, as did the rise of management consulting since World War II. New sources of supply and of labor had similar multiplier effects. Nevertheless, from the perspective of the entrepreneurial multiplier, technological change has been the most productive of the long, highly varied sequences we have examined.
Those entrepreneurial sequences, we believe, improve our ability to estimate the total impact on society of innovations like those associated with early textile and textile machinery development, with the expansion of aluminum production, and in the recent past with 3D printing. The changes were revolutionary in part because they spread through the economy and continued, long after the initial act of entrepreneurship, to foster economic growth and to shape and reshape the society’s culture and polity. The resulting changes easily crossed national frontiers. The nation state was still all-powerful in the military realm but not in the most important part of the economy.
For economic and business historians, the multiplier seems to us to suggest that we should look beyond the firm and trace the sequences of innovation that will give us a richer historical understanding of how and why capitalism has evolved over the past three centuries.lxxv These sequences will as well give us a better understanding of the economic, political, and cultural resilience of capitalism. The Entrepreneurial Multiplier will force business and economic historians (as it has the authors of this article) to look again to social, urban, and cultural history for a better understanding of the capitalist process. The Multiplier might also provide a new intellectual avenue between industrial and financial history and between history and the related behavioral sciences. Scholars in sociology, political science, management and anthropology – as well as economics – are exploring, to good effect, the history of capitalism. An elaboration and discussion of the multiplier will, we believe, facilitate further work in all of these disciplines and in business history.
While there are varieties of capitalism and differing patterns of entrepreneurship, there are as well some central aspects of this system of political economy.lxxvi It has, above all, promoted economic growth. “Crowding out” functions as a limiting factor as does the destructive side of the creative destruction that normally accompanies innovation. But the dual impact of the classical multiplier and the entrepreneurial multiplier has normally yielded the positive economic effects over the long-term that distinguish modern capitalism from all of its predecessors and recent competitors.lxxvii The adaptable entrepreneur has played and continues to play the lead role in that historical process.