Chapter Two, Part I

In 1899, Ransom E. Olds opened the Olds Motor Works in Detroit, Michigan. Olds had been in the automobile business since the midI 880s, when he built his first car, a steam-powered vehicle with three wheels. But success had remained elusive. After moving on to gasoline-powered cars, Olds started his own company in the early I 890s, but it floundered, leaving him nearly, destitute. He was only able to start the Motor Works, in fact, by convincing a financier named Samuel Smith to put up nearly all the money. Olds got his company, but he also got a boss to whom he had to answer. This was a problem, because the two did not agree on what the Olds Motor Works should be making. Smith thought the company should cater to the high end of the market, building large, expensive cars with all the trimmings. Olds, though, was more intrigued by the possibility of building a car that could be marketed to the middle class. In 1900, the auto market was still minuscule—there were fewer than 15,000 cars on the road that year. But it seemed plausible that an invention as revolutionary as the car would be able to find a mass audience, if you could figure out a way to make one cheaply enough.

Olds couldn’t commit himself to one idea, though. Instead, he dabbled, building eleven different prototypes in the company’s first year, including electric-powered cars in addition to steamers and internal-combustion-powered vehicles. It was a strategy that seemed destined for failure. But in March of 1901, bad luck lent a helping hand. Olds’s factory burned down, and all the prototypes went up in flames. All, that is, but one—which happened to be right near the door, and to be light enough that the lone man present could push it to safety. The prototype that survived, fortuitously enough, was the inexpensive, low-cost model that Olds had imagined could be sold to a much larger market. in the wake of the fire, Olds rushed the prototype into production. The vehicle he produced was known as the “curved-dash Olds,” since the floor curved up to form the dashboard. In design, it was an ungainly thing, a horseless carriage, started by a seat-side crank and steered by a tiller. It had two forward gears, one reverse, and a small, single-cylinder engine. It won no points for style. But at $600, it was within the reach of many Americans.

Though Olds was an engineer, he turned out to be something of a marketing whiz, too. He concocted elaborate publicity stunts— like sending a young driver eight hundred miles cross-country in an Olds to the Manhattan Auto Show—that won the attention of the press and of auto dealers while demonstrating to a still-skeptical public that the automobile was not just a gimmick. He drove a souped-up Olds in the first race at Daytona Beach. And in 1903, the company sold 4,000 vehicles, more than any other U.S. manufacturer, while two years later it stild 6,500 cars. Olds, it turned out, had designed the first mass-produced automobile in American history.

Olds’s success came in the face of fierce competition. In that first decade of the twentieth century, there were literally hundreds of companies trying to make automobiles. And because there was no firm definition of what a car should look like, or what kind of engine it should have, those companies offered a bewildering variety of vehicles, including the aforementioned steamers and battery- powered cars. The victory of the gasoline-powered engine was not a foregone conclusion. Thomas Edison, for instance, had designed a battery-powered vehicle, and in 1899 one sage had offered the prediction that “the whole of the United States will be sprinkled with electric changing stations.” At one point, a third of all the cars on U.S. roads were electric-powered. Similarly, steam-powered engines were seen by many as the most logical way to propel a vehicle, since steam obviously worked so well in propelling trains and boats. In the early part of the decade, there were more than a hundred makers of steam-powered cars, and the most successful of these, the Stanley Steamer, became legendary for its speed—in 1905, it went 127 miles per hour—and the comfort of its ride.

As the decade wore on, though, the contenders began to fade. Electric-powered cars couldn’t go far enough without a recharge. Steam-powered cars took a long time to heat up. More important, though, the makers of gasoline-powered cars were the first to invest heavily in mass-production techniques and to figure out a way to reach the mass market. Olds had been the first automaker to buy different parts from different manufacturers, instead of making them all itself. Cadillac became the first manufacturer successfully to use standardized components, which cut down on the time and cost of manufacturing. And Ford, of course, revolutionized the industry with the moving assembly line and a relentless focus on producing one kind of car as cheaply as possible. By the time of World War I, there were still more than a hundred automakers in America. But more than four hundred car companies had gone out of business or been acquired, including the Olds Motor Works, which had been bought by General Motors.

As for Olds himself, he never really got to enjoy the early success of his company since he left it after only a few years following a fight with Samuel Smith’s sons. He eventually started a new car company called REQ. But the moment had passed him by. What he had started, Henry Ford—who by World War I made almost half the cars in America—had finished. There was no more talk of steam- or electric-powered vehicles, and cars no longer came in a bewildering variety of shapes and sizes. Everyone knew what an automobile looked like. It looked like a Model T.

THE STORY OF THE early days of the U.S. auto industry is not an unusual one. In fact, if you look at the histories of most new industries in America, from the railroads to television to personal computers to, most recently, the Internet, you’ll see a similar pattern. In all these cases, the early days of the business are characterized by a profusion of alternatives, many of them dramatically different from each other in design and technology As time passes, the market winnows out the winners and losers, effectively choosing which technologies will flourish and which will disappear. Most of the companies fail, going bankrupt or getting acquired by other firms. At the end of the day, a few players are left standing and in control of most of the market.

This seems like a wasteful way of developing and selling new technologies. And, the experience of Google notwithstanding, there is no guarantee the end of the process, the best technology will necessarily win (since the crowd is not deciding all at once, but rather over time). So why do it this way?

For an answer, consider a hive of bees. Bees are remarkably efficient at finding food. According to Thomas Seeley, author of The Wisdom of the Hive, a typical bee colony can search six or more kilometers from the hive, and if there is a flower patch within two kilometers of the hive, the bees have a better-than-half chance of finding it. How do the bees do this? They don’t sit around and have a collective discussion about where foragers should go. Instead, the hive sends out a host of scout bees to search the surrounding area. When a scout bee has found a nectar source that seems strong, he comes back and does a waggle dance, the intensity of which is shaped, in some way, by the excellence of the nectar supply at the site. The waggle dance attracts other forager bees, which follow the first forager, while foragers who have found less-good sites attract fewer followers and, in some cases, eventually abandon their sites entirely. The result is that bee foragers end up distributing themselves across different nectar sources in an almost perfect fashion, meaning that they get as much food as possible relative to the time and energy they put into searching. It is a collectively brilliant solution to the colony’s food problem.

What’s important, though, is the way the colony gets to that collectively intelligent solution. It does not get there by first rationally considering all the alternatives and then determining an ideal foraging pattern. It can’t do this, because it doesn’t have any idea what the possible alternatives—that is, where the different flower patches—are, So instead, it sends out scouts in many different directions and trusts that at least one of them will find the best patch, return, and do a good dance so that the hive will know where the food source is.

This is, it’s important to see, different from the kind of problem solving that we looked at earlier. In the case of the ox-weighing experiment, or the location of the Scorpion, or the betting markets, or the JEM, the group’s job was to decide among already defined choices or to solve a well-defined problem. In those cases, different members of the group could bring differe’nt pieces of information to bear on a problem, but the set of possible solutions was already, in a sense, determined. (Bush or Gore would become president; the Yankees or the Marlins would win the World Series.) In the case of problems like finding the most nectar-rich flower patches, though, the task is more complicated. It becomes a twofold process. First, uncover the possible alternatives. Then decide among them.

In the first stage of this process, the list of possible solutions is so long that the smart thing to do is to send out as many scout bees as possible. You can think of Ransom Olds and Henry Ford and the countless would-be automakers who tried and failed, then, as foragers. They discovered (in this case, by inventing) the sources of nectar—the gasoline-powered car, mass production, the moving assembly line—and then asked the crowd to render its verdict. You might even see Olds’s publicity stunts as a kind of equivalent to the waggle dance.

One key to this approach is a system that encourages, and funds, speculative ideas even though they have only slim possibilities of success. Even more important, though, is diversity—not in a sociological sense, but rather in a conceptual and cognitive sense. You want diversity among the entrepreneurs who are coming up with the ideas, so you end up with meaningful differences among those ideas rather than minor variations on the same concept. But you also want diversity among the people who have the money, too. If one virtue of a decentralized economy is that it diffuses decision- making power (at least on a small scale) throughout the system, that virtue becomes meaningless if all the people with power are alike (or if, as we’ll see in the next chapter, they become alike through imitation). The more similar they are, the more similar the ideas they appreciate will be, and so the set of new products and concepts the rest of us see will be smaller than possible. By contrast, if they are diverse, the chances that at least someone will take a gamble on a radical or unlikely idea obviously increases. Take the early days of radio, when three companies—American Marconi, NESCO, and De Forest Wireless Telegraphy—dominated the industry American Marconi relied on investment banks to raise its capital from large private investors; NESCO was funded by two rich men from Pittsburgh; and De Forest Wire’ess Telegraphy was owned by small stockholders looking for a speculative gain. The variety of possible funding sources encouraged a variety of technological approaches.

Of course, even with diverse sources of funding, most endeavors will end up as failures. This was nicely expressed by Jeff Bezos, the CEO of Amazon, when he compared the Internet boom to the Cambrian explosion, which was the period in evolutionary history that saw the birth and the extinction of more species than any other period. The point is that you cannot, or so at least it seems, have one without the other. It’s a familiar truism that governments can’t, and therefore shouldn’t try to, “pick winners.” But the truth is that no system seems all that good at picking winners in advance. After all, tens of thousands of new products are introduced every year, and only a small fraction ever become successes. The steam- powered car, the picturephone, the Edsel, the Betamax, pen computing: companies place huge bets on losers all the time. What makes a system successful is its ability to recognize losers and kill them quickly Or, rather, what makes a system successful is its ability to generate lots of losers and then to recognize them as such and kill them off. Sometimes the messiest approach is the wisest.

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