Here\’s a paradox: If your firm produces a good or service that is a large part of the overall value of a final product, you may have a hard time keeping your price high or raising it. After all, precisely because you are a large part of total costs, any attempt to raise the price will be noticeable when passed on to customers, and those using your product have a strong incentive to take a tough line when negotiating terms. On the other side, if your firm produces a good or service that is necessary to a final product, but only a small share of total costs, you may be much more successful in keeping your price high or raising it further. When the price of your input climbs, it makes a relatively small difference to total costs. Aggressive competition from others to supplant your market niche may be less likely. Thus, it may be important to be unimportant, and fortunes can be made from unimportant inventions.
(Side note: John Maynard Keynes wrote a brief \”Introduction\” to Henderson\’s book. Here are the opening two paragraphs:
The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions. It is not difficult in the sense in which mathematical and scientific techniques are difficult; but the fact that its modes of expression are much less precise than these, renders decidedly difficult the task of conveying it correctly to the minds of learners.
Before Adam Smith this apparatus of thought scarcely existed. Between his time and this it has been steadily enlarged and improved. Nor is there any branch of knowledge in the formation of which Englishmen can claim a more predominant part. It is not complete yet, but important improvements in its elements are becoming rare. The main task of the professional economist now consists, either in obtaining a wide knowledge of relevant facts and exercising skill in the application of economic principles to them, or in expounding the elements of his method in a lucid, accurate and illuminating way, so that, through his instruction, the number of those who can think for themselves may be increased.
I have often quoted the opening two lines to those who want to know if economics systematically leads to liberal or convervative policy conclusions. But I also love the comment from Keynes in 1922–that is, well before he wrote the General Theory–saying that in the subject of economics, \”important improvements in its elements are becoming rare.\”)
Tenner offers some vivid example of important unimportant inventions. For example, the valve is quite important part of a tire, but a relatively small part of total cost. Back in the 1890s, August Schrader and his son George not only built a better valve, but also standardized the size of valves so that valves could connect with a variety of air pumps. It\’s why I can pump up either car tires or my bicycle tires with either a hand-pump in my garage or a mechanical pump at a gas station.
Or Jack and Belle Linsky, the founders of Swingline Corp., who invented the modern stapler. This was really two inventions: one was the way of gluing together a set of staples in a row so that they could easily be handled; the other was the stapler with a spring in the top that could open easily, accept the row of staples, and then align them for use. Before this invention, staples were individual loose objects: Tenner writes: \”
Virtually no manufactured object costs less than a staple. Yet this humble device so enriched the Linskys that they were able to compete successfully with the Queen of England
in auctions for decorative arts.\”
One more example originally due to Henderson is sewing thread–that is, not the threads used in making textiles, but the thread used in sewing textiles together for their eventual use. Tenner points to a prominent 1977 study
which argues that the social rate of return to industry-level investment in thread innovation was the highest of the sectors studied. Patrick and James Clark started the Clark Thread Company in Paisley, Scotland in the 1750s. Patrick is credited with inventing the idea that thread could be sold on a spool. Today, the \”multinational Coats Group Ltd. remains the world’s largest manufacturer of industrial sewing threads.\” Historical fortunes from Friedrich Engels to the Cartier-Bresson family were built in part on profits from superior threads.
It\’s interesting to think about the modern equivalents of these important unimportant inventions. I remember some years back reading about a highly successful Silicon Valley company (whose name escapes me) which focused on making items like the little flashing red and yellow and green lights that everyone else used in their equipment.
This insight applies at the level of job choices as well. Henderson\’s book back in 1922 pointed out that there were a number of different jobs in the process of making steal, including coal miners and smelting workers. There were many, many more coal miners, but precisely because their salaries were such a large part of costs, they had to push very hard for pay increases. Meanwhile, the smelting worker found it much easier to gain higher wages. Thus, the career advice is to look for a job niche where you (and those with similar skills) are essential to the final product, but not the main driver of final costs.