New Wine in Old Bottles

26 July 2010

Monday


No man putteth a piece of new cloth unto an old garment, for that which is put in to fill it up taketh from the garment, and the rent is made worse. Neither do men put new wine into old bottles: else the bottles break, and the wine runneth out, and the bottles perish: but they put new wine into new bottles, and both are preserved.

Matthew, Chapter 9, verses 16-17, King James Version

The Economics of Ideas


The metaphor of “old wine in new bottles” has become a familiar piece of political rhetoric when there is a desire to caricature the ideology of one’s opponent as merely the same-old-same-old that has been re-packaged to make it more attractive to the public and their changing taste in political fashion. This comes from a typically opaque New Testament parable, and calls to mind another Biblical quote: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” (Ecclesiastes 1:9, KJV)

Ecclesiates' explicit denial of novelty in the world: The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.

While one hears both “old wine in new bottles” and “new wine in old bottles,” The New Testament source of the metaphor concerns the latter, and this theme of novelty made palatable (if not possible) by familiarity is our theme today, and it is a very different theme from the sad wisdom of the Old Testament prophet and the denial of novelty in the world. I wish to make the case that we do indeed put new wine into old bottles, that we often do so of economic necessity, and that the extrapolation and generalization of this idea may be taken as a principle of economic organization, not least affecting the economics of ideas.

Recently I wrote several posts about the aviation industry (The Space Age, Addendum on The Space Age, and More on the Future of Aviation), and my sister in the industry again made a telling point in her correspondence with me: “The industry will have to go for … lighter more fuel efficient planes that carry more people. There is a lot of room to grow in that area, but people want cheap tickets, which they can get on the older, less fuel efficient planes”

The Boeing 787 Dreamliner is a long range, mid-sized, wide-body, twin-engine jet airliner developed by Boeing Commercial Airplanes. It seats 210 to 330 passengers, depending on variant. Boeing states that it is the company's most fuel-efficient airliner and the world's first major airliner to use composite materials for most of its construction. (from Wikipedia)

I was immediately struck by this observation, as it reveals an underlying economic tension between innovation and the tried and true way of doing things. Economics drives the airline industry, and even the intense focus on economical operation has not saved many major air carriers from bankruptcy and reorganization. The business model of the older, established carriers is under threat, if not already failed, and everyone in the industry knows it. The most financially successful companies in the industry are now those second-tier carriers who avoid large airport fees by flying into second-tier airports, and who sell bargain tickets while assessing additional charges for everything conceivable. Ryan Air is particularly well known in the industry for the amount of revenue they can derive from each seat apart from the price actually paid for the ticket. This is the only successful (i.e., profitable) business model in the industry today. Aviation week has reported in the story Low-Cost Leader that:

“Allegiant Travel Co. has been among the leaders in this category in past TPA studies, but this year it claims the top ranking by a wide margin. Its financial health score of 96 is higher than any other airline in any category. And it has steadily increased its net profit at a time when others were struggling with large losses.”

The success of this business model has come at a cost: a steep decline in the quality of customer service even while more people fly than ever before. And while a recession may temporarily limit growth in the industry, no one doubts that the growth will resume and that the number of people traveling by commercial aviation will continue to grow. Much of this growth has been fueled by lower ticket costs, which has made commercial air travel possible for many people who would never have considered air travel in the early stages of the industry. These lower ticket costs, in turn, came about from the thorough-going deregulation of the airline industry during the 1980s. Under former regulations, air carriers could only compete on service, and service as a result could be quite good; after deregulation, airlines could compete on price. They did, and the public responded dramatically by flying more.

Economics drives the commercial aviation industry, but there is a tension in the underlying economics. The enormous “legacy” air carriers that date from before deregulation, and which have been operating on a failing business model, still have capital, cash reserves, and banking connections that allow them to finance the purchase of new (or newer) planes. In most cases these newer planes are more fuel efficient. The enormous new Airbus A380 plane consumes less fuel per passenger per mile than any other commercial airplane. This is a strong economic incentive to update industry equipment. But the initial investment is staggeringly large. New planes are expensive, and ruinously expensive for small carriers.

The smaller air carriers that have emerged since deregulation, and which are profitably operating according to a different business model than the legacy carriers — Ryan Air and several other carriers in Europe; Southwest and Allegiant in the US — cannot afford the investment required for the newest, most fuel efficient airplanes. They buy used planes. Often they buy all their planes alike on the used market, so that the uniformity of their fleet streamlines maintenance and all operations that follow from more or less identical units in their fleet. The legacy carriers tend to have mixed fleets of many different aircraft, each requiring specialist mechanics, parts, and a type rating for the pilots for each of the type of aircraft operated. This kind of training can be quite expensive.

When I was thinking about these differing economic models a couple of days ago I realized that I had encountered this before, and in fact in Would You Rent a Room to a Speculative Realist? I quoted the great urban historian and theorist Jane Jacobs from her classic work The Life and Death of Great American Cities:

“As for really new ideas of any kind — no matter how ultimately profitable or otherwise successful some of them might prove to be — there is no leeway for such chancy trial, error and experimentation in the high-overhead economy of new construction. Old ideas can sometimes use new buildings. New ideas must use old buildings.”

Jacobs was writing about the economics of cities, where the physical plant consists of buildings, but the same is true for other industries with other physical plants. The same is true for the airline industry, for which the physical plant is the fleet of airplanes. Old business models can sometimes use (and afford) new plant and equipment; new business models must use old plant and equipment.

The underlying economic tension is this: new efficiencies are won by the use of less expensive but also less efficient plant and equipment. New ideas do not have capital and established credit and financing behind them, so they must make do, but in making do they realize new efficiencies that more than compensate for the lost efficiency of not having the latest and greatest plant and equipment. It strikes me now that this is precisely the mechanism by which stalled technologies — including social technologies like business models — are replaced by new technologies.

I have written about stalled technologies in several posts (The Law of Stalled Technologies, More on Stalled Technology). When a technology achieves a plateau of development, other technologies overtake them, and are exapted for use in different circumstances. The efficiencies won through the incremental improvements of stalled technologies are incremental improvements of efficiency, while the efficiencies won through a shift to a new technology can be (if only for a short time) exponential. Thus an exapted technology substituted for a robust and familiar technology, if successful, can be successful beyond what is possible for the old technology.

In more abstract realms of thought, the economics are more abstract, but the principle remains the same. In Radical Theories, Modest Formulations I pointed out how Einstein gave an essentially conservative first account of general relativity, avoiding radical implications of his theory that are now widely accepted (like black holes and the expanding cosmos) but which would have put the theory in disrepute in the early part of the twentieth century. Darwin, too, presented a less radical formulation of evolution than he might have presented. Darwin’s notebooks reveal to us how far and how fast his thought had progressed, and how many radical implications of his theory he had already thought about.

While Darwin and Einstein didn’t exactly pour new wine into old bottles, they also didn’t pour their new wine into completely new bottles: some elements of traditional biology and cosmology were retained even while radical new ideas were broached. Old ideas in biology and cosmology have all the prestige of the established social institutions that they support and which are supported by them, and so they receive impressive new structures (like endowed university buildings and the like), while new ideas in biology and cosmology must often make do with laboratories in basements and garages. As Jane Jacobs said, new ideas must have old buildings.

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