Of Disagreements, Sam Altman & Nanoeconomics of AI Industry

If business historians and industry evolution scholars are to be believed, there is nothing surprising happening with Sam Altman, OpenAI, Microsoft or even a purported new venture of his, should that be his direction of travel going forward.

At the time of writing, about a week after the drama started, Altman seems to be coming back to OpenAI (albeit with a new board) after speculations earlier for a spinoff enterprise and then being gobbled up apparently by Microsoft. Industrial economists like the late Steven Klepper from Carnegie Mellon University and his collaborators would have been smiling seeing the drama; this is exactly how it should have happened borrowing ideas from what they would call as the classic nanoeconomics of American technology firms, an influential book written by Klepper about 8 years back.

Nanoeconomics simply put captures how industries evolve not just because of macroeconomic or microeconomic conditions but also because of events as they unfold within a company at the employer-employee or people level. Klepper's book builds on his research with his collaborators over decades that have carefully documented these nanoeconomic trends in US automobiles, lasers, tires, semiconductors or in Bangladeshi textile industry.

And to just reassure us that history sometimes serves us right, organizational disagreements (ala the Slutskever-Altman tussle) indeed spawn new firm formation and spinoffs. This it seems to be happening now at OpenAI & with Sam Altman as they debate on the trade-off between growth and safe AI just about a year since ChatGPT hit planet earth with purportedly momentous thunder. Again, nothing unusual here about the timing too. The Klepperian stream of research show that usually spinoffs start by the 2nd year of a parent organization's success.

In 2007, Klepper first wrote about disagreements driving spinoffs in industries in a seminal Management Science paper. He documents in this paper the occurrence of it empirically in Detroit auto industry between 1895 and 1966. Later, with his co-authors, he further unpacked that between 1904 and 1921, atleast 5 out of the first 9 spinouts in Detroit auto industry were a result of intra organizational disagreements & goes on to show how it unfolded in other high-technology sectors of the era.

These ideas were later formalized by his collaborator economist Peter Thompson in a paper in 2011 in the Review of Economic Dynamics where he theorized, how when disagreements induced spinoffs, there is a change in the technological trajectory of an industry. First, the old technology may be persisted with by the spinning out entrepreneur; but it may also be that a new technology is developed by the spinning out entrepreneur. In the long run both options seem good for society because with the first it offers more competition within the same product market potentially also with downward price movements.? And in the second it offers new niches and differentiation enhancing aloha for consumers with expansion of technology choices.?

Perhaps then, this latest drama about the future of Sam Altman is an early signal for the soon forthcoming spinoff waves in AI induced as predicted by nanoeconomic theory, through disagreements. Ultimately, it may be likely good for AI and the development of its technological trajectory in the long run. Prices for AI products may spiral down with competition or new AI choices could offer more benefits to society & consumers.

It's also interestingly a non-regulatory way to reduce market power of a dominant first mover, which should please antitrust hawks pondering about societal welfare with AI. Steve Klepper saw this dynamic as a way to spawn experimental capitalism in his seminal book and corroborated it using his empirical pallet in US business data. Noted evolutionary economic scholars like Sid Winter too found this as a natural denouement of industries.

But if this is all good, will it impact the quality of firms that maybe formed with spinoff activity in generative AI? Here too, there are findings from the Klepperian world to borrow from to pontificate on this. For example, this stream of scholarship has hypothesised, tested and found that better-performing firms had a higher spinoff rate, spawned better-performing spinoffs and further causing location clustering of firms which results in gains from agglomeration in a similar region.

That is where one likely should be keeping an eye on now with the unfolding of the Sam Altman saga. Hopefully with his signals for exit given disagreements, and even if he is back, it will spawn a wave of new firms in AI that will be more productive & offer better quality AI products, enhancing societal welfare in the long run.

Klepper & his collaborators have shown that this is indeed what happened with historical automobiles in Detroit or with textiles in Dhaka but can be likely expected to happen again in the AI Valley in California. Overall, for society, Sam Altman is doing not too bad, time to sit back and relax where it all goes with an ushering in of Klepperian nanoeconomics in the world of AI.

Select References

1. Klepper, S. (2007). Disagreements, spinoffs, and the evolution of Detroit as the capital of the US automobile industry. Management Science, 53(4), 616-631.
2. Klepper, S. (2009). Spinoffs: A review and synthesis. European Management Review, 6(3), 159-171.
3. Klepper, S., & Thompson, P. (2010). Disagreements and intra-industry spinoffs. International Journal of Industrial organization, 28(5), 526-538.
4. Thompson, P., & Chen, J. (2011). Disagreements, employee spinoffs and the choice of technology. Review of Economic Dynamics, 14(3), 455-474.
5. Mostafa, R., & Klepper, S. (2018). Industrial development through tacit knowledge seeding: Evidence from the Bangladesh garment industry. Management Science, 64(2), 613-632.
6. Agarwal, R., Buenstorf, G., Cohen, W. M., & Malerba, F. (2015). The legacy of Steven Klepper: Industry evolution, entrepreneurship, and geography. Industrial and Corporate Change, 24(4), 739-753.
7. Agarwal, R., & Braguinsky, S. (2015). Industry Evolution and Entrepreneurship: S teven K lepper's Contributions to Industrial Organization, Strategy, Technological Change, and Entrepreneurship. Strategic Entrepreneurship Journal, 9(4), 380-397.
8. Braguinsky, S., & Hounshell, D. A. (2016). History and nanoeconomics in strategy and industry evolution research: Lessons from the Meiji‐Era Japanese cotton spinning industry. Strategic Management Journal, 37(1), 45-65.