Undercover Economist

Like great coffee, good ideas take time to percolate

Monmouth Coffee opened on Monmouth Street in London in 1978. It serves wonderful coffee and the queues often stretch out of the door. That is what makes what happened next so surprising.

What happened next was: nothing. Monmouth had few imitators, either upmarket or downmarket. Starbucks did not arrive in London for another 20 years. A handful of gourmet cafés serving New Zealand-style coffee only began to open in 2005. They’re very good, although I still prefer Monmouth. It’s now possible to get good coffee in several spots in London, but it is hardly ubiquitous. It is even more elusive outside the capital.

This is a puzzle. Monmouth may not be a global titan like Starbucks, but it appears to be a highly successful business: the coffee is priced confidently and it is popular. So why has such an obviously good idea been so slow to spread?

Even if you don’t much care about London’s coffee scene, this is an important question. William Gibson, science fiction author, observed that the future is already here — it’s just not evenly distributed. In that respect, it is much like good coffee. Economics agrees with Mr Gibson — which is fortunate, since he is little short of a prophet.

The data show that just because good ideas emerge does not mean that they spread quickly. Researchers at the OECD have concluded that within most sectors (for example, coal mining or food retail) there is a large and rising gap in productivity between the typical business and the 100 leading companies in the sector. The leading businesses are nearly 15 times more productive per worker, and almost five times more productive even after adjusting for their use of capital such as buildings, computers and machinery.

These are not small gaps. If there were some way to help good ideas to spread more quickly, more people would have good coffee and much else besides. One natural approach is for a laggard company to seek advice — perhaps from management consultants. A decade ago, economists at Berkeley, Stanford and the World Bank conducted a randomised trial in which the bank paid for some textile factories in Mumbai to receive consulting advice from a global company. These factories tended to have utterly chaotic systems, so help with modern inventory management made a big difference. The factories saw their productivity transformed.

More recently, those economists revisited the experiment. How much of the good advice had lasted? Had any of it spread? There was good news and bad news. The good news was that within companies that owned several factories, some of the good ideas first used in a single factory had been adopted across the company. But the bad news was that these proven management processes had not been copied by rival businesses.

This is a reminder of how slow good ideas can be to spread, even when they are straightforward to grasp. In his classic textbook, The Diffusion of Innovations (UK) (US), Everett Rogers points out that many inventions have to cross a cultural divide: the person preaching the good idea is often quite different to the person being preached to. Rogers would probably not have been surprised to see that “not invented here” was a barrier to good practice spreading in the Mumbai textile industry.

So good advice can work, but even good advice wears off. And we can all be resistant to new ideas. The status quo is comfortable, especially for the people who get to call the shots.

An extreme example of resistance to change lies behind the quip that “science advances one funeral at a time”, based on an observation from the physicist Max Planck. A team of economists has studied the evidence from data on academic citations, and found that Planck seems to have been right: the premature death of a star scientist opens up his or her field to productive contributions from outsiders in other domains. People can be so slow to change their minds that we literally have to wait for them to die.

There is an analogy in the marketplace: sometimes old businesses have to die before productivity improves, although that can mean desperate hardship for the workers involved. But sometimes bracing competition does not kill companies, but makes them stronger.

For example, when iron ore producers in the Great Lakes region found themselves exposed to cheap competition from Brazil in the 1980s, the century-old industry faced a crisis. The response — as tracked by economist James Schmitz Jr — was a dramatic surge in productivity, unleashed by changes in work practices. Other economists have found similar responses to trade shocks elsewhere.

And for all the talk of relentless change, there is evidence that US industry is becoming less dynamic: there are fewer shocks, and companies respond less to them. The OECD research, too, suggests that the productivity laggards tend to be further behind in markets that are over-regulated or otherwise shielded from competition.

All too often, we don’t pick up good ideas willingly. We grasp for them, in desperation, only when we have no choice.

Written for and first published in the Financial Times on 2 February 2018.

My recent book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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