02/29/2012 09:12 am ET Updated Apr 30, 2012

A Few Thoughts on Bell Labs

In The New York Times' Sunday Review, Jon Gertner has an essay, a curtain raiser to a soon-to-be-published book (The Idea Factory: Bell Labs and the Great Age of American Innovation, March 15), looking back at the astounding achievements of the old Bell Laboratories. The research unit of the pre-breakup AT&T had a hand in any number of inventions and innovations in and around telecom, from the deeply theoretical, like Claude Shannon's work in communications theory, to the most "useful," in terms of technological development, such as the laser, the transistor and the design for cellular telephony. Reading Gertner's article, one is reminded of how large Bell Labs once loomed and how much has changed. Bell Labs harkens back to an age that viewed the largest corporations as not only the vanguard of modernity, but the most rational, most innovative, organization in history. This belief in corporate size, articulated by economists as disparate as Joseph Schumpeter and John Kenneth Galbraith, began to come apart in the '70s (perhaps the '60s if you consider the counterculture as a force for decentralization). This view of the world argued that size and stability trumped the merits of competition and speed; that monopolies might be bad for consumers (and for the real economy: in the '30s, monopolies and cartels were blamed for everything from the Great Depression to the emergence of Nazism) and required careful regulation, but that they were essential for the kind of long-term investment required to drive real innovation. AT&T, which had long been the subject of antitrust attention, was the exemplar of that notion -- and Bell Labs provided the fruits.

Gertner makes an excellent point: Those fruits were quite remarkable. He extends that discussion to focus on deeper questions about innovation. "But what should our pursuit of innovation actually accomplish?" He rolls out the old Bell Labs approach: that "innovation is an important new product or process, deployed on a large scale and having a significant impact on society and the economy." He compares it with the approach that followed the Bell Labs model, that is, the entrepreneurial, venture-backed startups of Silicon Valley. "Regrettably, we now use the term to describe almost anything. It can describe a smartphone app or a social media tool, or it can describe the transistor or the blueprint for a cell-phone system. The differences are immense. One type of innovation creates a handful of jobs and modest revenues; another... creates millions of jobs and a long-lasting platform for society's wealth and well-being." Gertner, who is overstating this dichotomy, concludes with a deceptively simple, if true, statement: "There's no single way to innovate." Silicon Valley's ways have worked, and will succeed particularly in consumer technologies. But the now seemingly anachronistic Bell Labs was both productive and amazingly effective over a long period of time. Bell Labs arguably enabled Silicon Valley.

How to unpack all this? Gertner is joining a debate that has been going on quietly for a number of years now, but which, with economic distress, is now resurfacing. One manifestation of that is the talk generated by Tyler Cowen's The Great Stagnation, which argues that the U.S. has picked all the low-hanging technological fruit and has now entered an age of stagnating innovation. Nailing that thesis down is difficult (I've posted on this here and here). But there's another thread lurking here as well. That theme, which surfaced most noisily in the competitiveness debates of the early '90s (it's strangely quiet now, though it shows up in, say, the Romney private equity debate and in regulatory discussions about the banks) is a critique of the financialization of corporate America, not only over the role Wall Street played in breaking down the nearly feudal hegemony of large corporations through M&A in the '80s, but in impressing an equity performance culture on corporate America. As stock trading grew cheaper in the '70s, turnover exploded, and the governance cult of shareholder value emerged. In a faster, more market-oriented, equity-driven arena, not only did competition rise and profits for supporting longer-term R&D shrink, but time horizons did as well. Large corporations either broke up, like AT&T, or found that supporting the kind of long-term research of a Bell Labs simply didn't fly with shareholders. Indeed, the shareholder value approach was immeasurably boosted by the very real technological triumphs of Silicon Valley.

Gertner's essay does remind us of another way, or of a kind of approach that, with the exception perhaps of IBM, has been mostly abandoned. (One might argue that the Bell Labs approach remains in Big Pharma, which still pursues long-term research in a big way. But even that has increasingly focused on product as costs have risen, productivity has flagged and the countermodel, biotechnology, has grown. Life sciences have, however, a longer-term vehicle for research in the National Institutes of Health, and the research universities. But even they have been nudged toward technological accountability.) Gertner himself seems to know there's no going back to the world AT&T once occupied. The question then is this: Can you have both on any viable basis? Why did this shift take place and how can you insure the underlying financial stability (not to say the compensation of world-class researchers) to support longer-term research and development? Is there a sweet spot here that allows both models to function?

The fact is AT&T, for all its glorious past, was crumbling when antitrust authorities finally handed down the breakup order in 1982. Bell Labs might still have been a wonderful place to work, but a telecom monopoly was clearly not capable of coping with the innovation that was about to explode. The real death knell of the old AT&T was a kind of unstoppable, uncontrollable change; indeed, the old Ma Bell was reorganized by J.P. Morgan and operated as a natural monopoly by Theodore Vail in the early 20th century to exert control over change that bordered on chaos. But as the pace of change and innovation accelerated -- driven primarily and ironically by postwar developments out of Bell Labs -- the merits of size, stability, monopoly and financial power eroded. The emphasis turned to efficiency, profitability, share performance and adaptability. A company operating quarter to quarter, with the need for reinvention (and its enabling technology, M&A) always in front of it, does not fit well with a large research unit with one eye at least cocked on fundamental breakthroughs and keystone inventions.

And yet you need those keystone inventions, which are exactly what Cowen and the stagnation thesis crowd insist has gone missing. The easy, if gloomy answer here is that we're just suffering through a cyclical dry spell and that even if Bell Labs came back to life it would struggle to reprise the past. (The questionable converse of that is Bell Labs boomed in a time when R&D was "easy.") The other view, which Gertner seems to believe, is that we've lost a key structural aspect of fundamental innovation: the long-term freedom from the pressures of the marketplace. At the end of the day, Gertner is saying that the market need not shape every intellectual or scientific activity; that stepping back may be the means to see further and deeper; and that it takes many paths to a healthy innovation economy. He's undoubtedly right. But in an age when even cash-strapped governments are viewed as market-sensitive businesses, I just can't see a viable way to make it work.

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Robert Teitelman is editor in chief of The Deal magazine.