Saturday, October 3, 2009

The Outlines Of The Mentor State


In my last post, I told the story of taking my old BMW to Dave Marshall’s garage in New London, New Hampshire; of the novel opportunities for entrepreneurial growth the new technologies have bestowed on him. I suggested the ways he was keeping up his end of a new social compact, and I ended the post by suggesting also that there was another side to this compact, a novel role for government—which I’ve nicknamed “the mentor state”—whose responsibilities to the commercial ecosystem we are just beginning to understand.

Given the often heated reaction to this post, let me hasten to reassure readers, what I took to be self-evident, that the first responsibility of any democratic government (including the one we ought now to envision) is the cultivation of citizens; obvious things like the comparatively excellent public schools in New London, or the New London hospital, which enjoys a measure of municipal support, or land conservancies that make New London beautiful. Kant once said that all things, including people, can be seen as both ends and means; that as ends we have a dignity, as means we have a price. The first role of government is to attend to our dignity.

But unless we commit to socialism in the full sense, which has its own obvious pitfalls, we resign ourselves to the ways of market economies. Governments, Smith said (and who disputes this?), also have to “facilitate commerce in general.” They enforce contracts, protect property, inhibit monopolies, and build roads and bridges. How has the new economy changed, extended, the scope of government action? What will the mentor state do differently?

Actually, Dave's story suggests one of the most important new responsibilities—well, not exactly new, but novel in its importance—which Dave saw clearly, but makers of public policy usually see more dimly. In this particular case—Dave’s repair of my car’s computerized heater/air-conditioner—the federal government had acted some years before, largely behind the scenes, to determine critical standards upon which all mechanics like Dave now depend—standards it set deliberately, without waiting for market conditions to evolve them haphazardly. These standards opened the playing field for entrepreneurs like Dave, while the big car companies would have preferred no standards whatever:

EVERY COMPUTER IN every car is governed by specialized software. Cars are becoming bundled computers on wheels. Back in 1995, the EPA mandated that the “port”—the interface connecter—to the engine's main computer be of a standard size, so that every mechanic's “scanner”—a critical piece of diagnostic equipment—could be manufactured and programmed to handle all cars. (Think of how every personal computer's USB port is a standard size.) For the EPA, the chief consideration was empowering local garages to check cars for a yearly road-worthiness sticker, including compliance with state emission standards. But there were more important collateral benefits, which not all parties fully understood at the time.

To put things simply, were the hardware fittings for each car as proprietary as the diagnostic software, Dave could never have afforded the wide spectrum of appliances that he would have needed to serve all makes. The cost of hardware would have become (what business schools call) a “barrier to entry.” Imagine having to buy one computer for word processing, another for spread-sheets, another for browsing the web, etc.

But since, by law, the hardware fitting conformed to a mandated standard, Dave only had to purchase the BMW diagnostic software—not cheap, but cheap enough to allow him to compete with BMW dealers. (On the whole, software is always much cheaper than hardware, because—again, in business school jargon—the “marginal cost” of adding another customer is essentially nothing: make software for one customer and you've pretty much made it for a million.)

So Dave was able to buy a standard scanner and then supplement his purchase with a portfolio of custom software for most lines of cars. Mandated standardization unleashed a new competition to provide local excellence.

Government standards meant that the complex repair market, which would otherwise be stacked in favor of big dealers even after warrantees expired, could now include smart, independent technicians like Dave as well. The EPA did not presume to “regulate” competition in the diagnostic or repair industries. No bureaucracy presumed to control the provision of services. What the EPA did, rather, was precipitate a self-organizing system of repair-shop competitors, who themselves used the platform to overcome any barriers to entry and find their own ways to pursue distinct business offerings—services in which the EPA had an interest, and services like Dave’s, which the EPA had no interest in at all.

Indeed, the small-shop repair industry organized itself so well that, almost from the start, a partnership developed between two non-profit trade associations, which might have been at each other's throats: one representing repair shops like Dave’s, and the other, manufacturers and their dealers. By 2003, the Automotive Service Association (ASA) had reached an agreement with the Association of International Automobile Manufacturers (AIAM) on a series of standards to keep “after-warranty” repair open to smaller shops, where 70% of repairs are now done.

The quid pro quo for the manufacturers was an agreement that repair shops would not infringe on manufacturers’ intellectual property—the source code for automotive software, which the repair shops did not need to compete. This may seem a humdrum development, but it is hardly that: by comparison, cell phone makers agreed only this past January, and under pressure from the European Union, to a standard for charging handsets through the USB cable.

IN A SINGLE stroke, in other words, the government catalyzed a “cross-sectoral” partnership, a new kind of cooperation between the public and private sectors. Enforced standardization led to more voluntary standardization, which led to market efficiencies and personal opportunities. The government had inadvertently created not only new terms of competition for entrepreneurs, but demonstrated a new means of delivering a public good.

The relevance of this model to the delivery of healthcare should be self-evident. To deliver a “public option” the first priority is to subsidize people who cannot buy into any plan, private or non-profit. But the next should be standards for claims processing, disease monitoring, and digitizing medical records. If this is done, we will not need huge insurers, or a Medicare-sized bureaucracy, to gain efficiencies and create buying consortia for drugs and medical devices. If this is done, the non-profit cooperative idea might well work better than any other, for it will encourage the development of non-profit HMOs, specialized hospitals and clinics, and reduce the perverse incentives built into fee-for-service.

THE RESPONSIBILITIES OF the mentor state are too complex to do justice to here. But some things can be said. First, the mentor state must enhance the “network effect” of linked businesses, nationally and internationally, much the way corporate leaders now manage businesses through the development of their knowledge management platforms. This means tending to the platform directly: building out the platform’s hard infrastructure, making access universal, and mandating, where necessary, protocols for the platform’s software spine infrastructure. It will encourage “open source” where possible; it will build continuing systems of classification for vanguard science, the new “roads and bridges” of the knowledge economy.

It will reform the overburdened patent system, and define new protections, distinct from patents and copyright, for inherently shared forms of intellectual property. It will use public sector institutions to advance novel methods of compensation for “snips” of information which cannot be protected as intellectual property, but are everyday assembled into intellectual property.

Biopharmaceutical companies, for example, have over $28 billion tied up in research, and National Institute of Health sponsored labs have over $30 billion. Consider how universities, developers of bioinformatics platforms, etc., would benefit from (what they call) “common ontologies” for structured scientific findings—and especially in vanguard fields such as genomics and proteomics, where different researchers, coming from different frames of reference, are always calling essentially the same physical events by different names. It would be natural for the publically funded NIH to take the lead here, especially in the most advanced areas, where language for findings is least standard. Such systems of classification give a new meaning to roads and bridges.

Indeed, what about protection for “negative findings” that are by-products of ordinary work—information about things that don’t work. This kind of information is mostly trivial but not always. It is anything but trivial in life sciences, where eliminating candidate drug molecules from a biopharmaceutical company’s pipeline early on may save this company tens of millions of dollars. You cannot patent the fact that a particular molecule does not work, or is toxic, in mice at a certain dosage. But another company at the other side of the world would pay real money to find out about failed experiments elsewhere. The government will have to regulate how participation is promised and compensated and what information is withheld, much as the Security and Exchange Commission regulates audits.

Second, the mentor state will focus on the triangular challenge of cultivating human capital: education, healthcare and environmental decency, which corporations will not do. The mentor state will, however, pursue these goals in innovative ways exploiting the virtues of the platform itself. It will, as Michael Porter and others have written, set strict performance specifications, and prompt start-ups and chartered non-profits to compete on enacting technical specifications. It will thus catalyze cross-sectoral partnerships (like charter schools, teaching hospitals, eco-partnerships, etc.) to pursue the social good more efficiently than through direct government agency. It is peculiar that school choice (vouchers, etc.) are considered a rightist proposal, and single-payer health insurance is considered a leftist proposal, when both rely on this same reasonable logic.

Third, for people incapable of making the transition to knowledge work, the mentor state will invest in—and employ many thousands in creating—an environmentally sound educational and communications infrastructure for future generations. Our children will need many smaller and better schools, competing with each other to advance curricula. They will need many more small liberal arts colleges. They will need national service programs that teach them teamwork, diversity, and poise. They will need wireless networks, ecologically friendly trains, and more—even where private investors would earn only marginal returns. Our inner-city children will also need thousands of preschool centers, thousands of wellness clinics. The cost will be great, but not as great as the costs of not making timely investments in our citizens’ minds and bodies.

THIS MENTOR STATE will rise in fits and starts, but rise it must, and this is very good news for citizens and entrepreneurs both. It means that where life in the industrial factory once deformed people by requiring dumb, repetitive tasks, life in the solutions team elevates human skill, requiring deep literacy, curiosity, and a cosmopolitan heart. In the bounded logic of commercial markets, people are still means not ends: they have a price, not a dignity. But the fact that there is more to our lives than markets does not mean we should fail to consider how to make market society work as well as it can.

The good news is that—for the first time in the history of capitalism, really—life on the job will enhance the skills and means that engender democratic citizenship. Never before have human faculties been advanced by ordinary work. This is a relief, or would be, so long as we qualify people to work at all.

6 comments:

Stuart Levine said...

You've missed one disturbing trend: The cost of software to dealers is significantly cheaper than the cost to other mechanics.

The reason: Manufacturers want to keep their dealer networks alive and well. However, there is a great deal of downward pressure on new car prices, pressure that reduces dealer profits.

The solution: Limit the size of the market for repairs of your brand of auto by charging non-dealers extra for the software. This raises the cost of repairs (and, of course, the "lifetime" cost of ownership of any particular car) and limits the number of non-dealer mechanics who can service all makes and models of autos, but does so in a way that is opaque to a prospective purchaser of an auto. In other words, the car costs more than the sale price would indicate because repairs are more expensive.

But, as the late Billy May would say: There's more. Auto dealers are more likely to use manufacturer branded parts, even though their more expensive than "black box," generic parts. So, the manufacturers benefit by (i) channeling a secret subsidy to their dealers, allowing the "initial" the sale price to be reduced, and (ii) it becomes more likely that the brand name replacement parts that they manufacture will be used in repair work.

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