Entrepreneurs, Teams, and Bureaucracy in Post-WWII America

This article leans against specialization by cutting across three disciplines to analyze the entrepreneurial function in modern, U.S capitalism. The author blends the basic ideas of Joseph A. Schumpeter (economics), Alfred D. Chandler (history), and Max Weber (sociology), with recent work done by Daniel Kahneman in behavioral economics. Two case studies are used to illustrate how these ideas interact in the study of innovation; one of the case studies focuses on a startup business and the other on a large, well-established, bureaucratic firm.

well be the most significant of the cognitive biases (Note 11)." Insofar as startups were significant during the post-WWII era, Kahneman makes us ponder the System 2 (slow thinking) capabilities they needed to succeed; they include: the ability to raise capital under conditions of uncertainty; to build an effective team; and to deal successfully with their business's competitive and political environments.
Insofar as large firms were innovative, Kahneman can benefit by accommodating Chandler's great contribution: his emphasis upon the benefits of the massive organizational changes that took place when U.S. business leaders transformed centralized into decentralized and diversified industrial firms.
Once again, there can be a creative sharing of ideas.

Max Weber and Kahneman
Now let's add our third great hedgehog to the history. The sample I am using from Weber's extensive work is the section of "The Theory of Social and Economic Organization" that deals with the three great structures of authority (Note 12). You will probably recall that Weber said bureaucracy "is superior to any other form [of authority] in precision, in stability, in the stringency of its discipline, and in its reliability." Central to Weber's theory was his conclusion that all of the modern, developed societies had moved relentlessly toward the bureaucratic structure of authority because it was the most rational and efficient way to organize large groups of people (Note 13). Weber's focus was primarily on the public sector, but he was mindful that modern businesses were also bureaucracies.
The task of blending Weber's sociology of "pure types" with behavioral economics and focusing the combination on entrepreneurship is challenging because Weber never seems to have worried about innovation and Kahneman only flirts briefly (pp. 417-418) with organizations and never specifically discusses bureaucracy. Despite this problem, I think we can link these two bodies of thought.
Fortunately, Chandler and Schumpeter have provided us with intellectual bridges to Weber through their descriptions of private sector bureaucratization and its implications for the capitalist system.
Schumpeter was intensely negative about both public and private bureaucratization; Chandler was intensely positive about what he referred to as "professional management". He was largely dismissive of the public sector.
Left suspended between these two evaluations, we can start to figure out where we stand by asking how public and private bureaucracy impacted the fast thinking (System 1) aspects of entrepreneurship.
Clearly-following analysts such as Robert Merton, James B. Taylor, and Alvin Gouldner-bureaucracy in all of its forms primarily impaired the entrepreneurial instinct. In both startups and large firms, the leaders needed to grapple with what Kahneman calls WYSIATI, the assumption that "What You See Is All There Is". WYSIATI and the closely related "sin" of hubris clearly kept many American executives from anticipating the intense global competition of the 1970s and 1980s (Note 14). Where slow thinking (System 2) aspects like obtaining capital, engaging in marketing and sales, and handling accounting were involved, however, the histories of entrepreneurship and bureaucratic authority are a mixed bag of negative and positive outcomes (Note 15). Perhaps the best way to start sorting those out is to look at some specific examples of entrepreneurship in postwar America.

Results: System 1 and System 2 Thinking in Two Entrepreneurial Ventures
For purposes of illustration (not proof) we can consider a specific example of successful innovation in the midst of the intense, destabilizing postwar competition. This case involves the classic startup firm with a clearly identified entrepreneur. The business in this instance is SNL, which should prompt you to reflect for a moment on the 1980s when the United States suffered through a Savings and Loan (hence S&L) crisis. The problem that entrepreneur Reid Nagle set out to solve, however, did not directly involve regulation, deregulation, or inflation-some of the problems used to explain the crisis.
Nagle's interest was in supplying accurate and timely information to those large firms that had economic ties to the S&Ls-a System 1, fast-thinking decision. He knew from experience that each of these organizations had to dig out and evaluate the information they needed from each S&L with which they were doing business. In effect, he was proposing to make business bureaucracies his market and make them more efficient by consolidating and selling information from the regulatory bureaucracy.
Nagle built a small organization around the task of searching for, consolidating, and selling information that was available to anyone. Using his own capital and advice from his network, he paid to have a unique computer platform developed for the data. In the course of these System 2 activities, he had the advantage of an extensive personal network and his prior experience in this corner of finance.
Despite Nagle's strengths, SNL had three major problems in its early years, all of which required substantial System 2 capabilities. Before the development of personal computers and the Internet, the work of gathering and processing information was extremely labor-intensive. Nagle, his wife, and staff had to dig out the information they needed in Washington, Xerox it, and then, back in their Hoboken headquarters, transfer it to their platform, process it, and print it out (Note 16). For a considerable length of time, Nagle was putting in the kind of 100-hour weeks we usually associate with two-job, recent immigrants and DC cab drivers. The second major problem was working capital. Like many a startup before and after SNL, Nagle ran out of money. He was forced to sell some of his time in consulting, and he "maxed" all of his credit cards before he managed to acquire the investment capital he needed without losing control of the firm. The third problem was competition. He was not guilty of WYSIATI. He knew he did not have patent protection for what SNL was doing and he knew a good bit about the other organizations selling the same or similar information. His competitors were, however, connected to other financial institutions that were likely to be competitive with the businesses Nagle had targeted as his likely customers. He saw where his competitors were vulnerable. That was his initial selling point and it proved to be effective. His bureaucratic competitors suffered a fit of WYSIATI and reacted too slowly. With his platform in place, he was then able gradually to expand, with very little additional cost, the information he could provide. As he did so, SNL competed by offering add-ons free and pushing additional competitors out of the market. Nagle's variant on this "Pac-Man strategy" was successful and would later be employed by a number of the high-tech giants of the digital era (Note 17). Happy to be an entrepreneur but less happy as a manager of a successful firm, he finally sold SNL to Standard & Poors for $2.25 billion in 2015.
This successful outcome leaves us with two big questions to ponder: First, if this type of innovation was going on across a broad front in the digital era-and there is substantial evidence that it was-why do the improvements not show up in our figures for Total Factor Productivity? Second, if bureaucratization was generating opportunities like this for innovation, does it seems possible that America's future will be with a workable form of democratic capitalism and a compromise between America's bureaucratic and entrepreneurial organizations and cultures? That, for the short-and the middle-term appears more likely than a Kafka-like dystopia. Gadsden was not a scientist; he had come to leadership through sales and marketing. When he followed this advice and appointed Dr. Roy Vagelos as head of basic research in 1974, he was embracing substantial uncertainty and making himself the financier (á la Schumpeter) of an entrepreneurial venture in a bureaucratic setting (á la Chandler and Weber). The Merck bureaucracy (contra Weber and á la Robert Merton's critique) quietly but forcefully resisted this transition to targeted, biochemical research.
The primary entrepreneur, Vagelos, had also embraced uncertainty (contra Schumpeter) because he had no prior knowledge of business. He had, however, substantial experience in science team building; he had extensive successful experiences in public (NIH) and non-profit (Washington University) bureaucracies; and he quickly built a team (System 2 á la Kahneman) to explore in cardiovascular treatments the kind of targeted research that was "on the tip" of biochemistry and enzymology (his primary professional networks) in the 1970s. The result of this effort was a break-through statin-a multi-billion-dollar drug-and his effort to transform the company's research and development did not end with this initial innovation (Note 20).
An additional challenge came in the vaccine division, one of the firm's most successful operations.
Indeed, the problem emerged following an outstanding innovation, a new vaccine to prevent Hepatitis B infections. After more than ten years of research, Maurice Hilleman, the head of Virus and Cell Biology, developed an effective vaccine by using particles of the antigen taken from the blood of carriers infected with the virus. Many of those carriers, however, were also infected with HIV, and that www.scholink.org/ojs/index.php/jrph Journal of Research in Philosophy and History Vol. 3, No. 1, 2020 32 Published by SCHOLINK INC. prompted Vagelos to look for a new way to produce the vaccine. Current developments in rDNA technology offered a solution, but Merck lacked the scientific and technological capabilities needed to move down that path (Note 21). After appointing a new head of the research effort and creating a three-headed alliance with a leading scientist and a biotech, Merck was able in 1986 to bring out Recombivax HB, the world's first rDNA vaccine (Note 22).

Discussion
As the SNL and Merck experiences, as well as other business histories from this era, suggest, the links between bureaucracy and innovation were more complex than any of our distinguished intellectual hedgehogs have indicated. While a bureaucratic culture might well impede innovation á la Schumpeter (and Merton), bureaucracies have continued to provide new opportunities for the individuals and firms selling them services (á la SNL). This allowed new firms like SNL to pursue their System 1 visions and test and improve their System 2 capabilities. Most of these efforts failed, as they always have in capitalist societies; WYSIATI has continued to foster discouraging mistakes. But the successes have and could in the future continue to foster disruptive innovations that keep the economy in disequilibrium (á la Schumpeter), on a positive growth path (Note 23).
Meanwhile, new sciences and new technologies have encouraged even well-established, bureaucratic organizations to change, to embrace higher levels of uncertainty and risk, and to encourage and sustain internal entrepreneurs (á la Merck and Chandler). If we scan across the entire U.S. postwar economy in the 1960s, 1970s, and 1980s, it will be apparent that this type of responsive, innovation-oriented private enterprise was the exception, not the rule, in many of America's leading industries. WYSIATI was the rule in automobiles, tires, and machine tools. Hence, the feeble U.S. business response when faced by intense overseas competition. This was also the case with the postwar public bureaucracies that provided more opportunities for others to innovate (á la SNL) than public innovations like the Internet (Note 24). Kahneman's behavioral economics helps us break open and analyze these activities, cultures, and organizations as we push forward with the history of American capitalism, its entrepreneurs, and entrepreneurial enterprises.