Proposition 13 and Innovation

September 2, 2009

Innovation works best not when worlds collide, but when they are shared. Sometimes sharing takes place because there are no good alternatives.

At one time the public schools in California were among the best in the nation. No more. In 1978 two-thirds of the voters, in what has become a chaotic practice of bypassing normal legislative channels to amend the state constitution, approved a tax reform referendum known as Proposition 13. Championed by a politician named Howard Jarvis, Proposition 13 or “The People’s Initiative to Limit Property Taxation,” capped property tax rates and required a 2/3 supermajority in both houses of legislature for any future tax increases.  The immediate effect of Prop 13 was a 57% decline in property tax revenues. Despite strong evidence that it is a root cause of the current fiscal crisis in California, Proposition 13 remains a wildly popular measure among Californians.

Less controversial is the impact that Proposition 13 had on the state’s public schools, which on the average lost half of their tax revenue. Before Proposition 13 and a ballot initiative known as Proposition 98 (which had the unintended effect of capping overall school expenditures) California’s per-student annual expenditures were about $400 above the national average.  By 2000, per-student spending had dropped to $600 below the national average. That trend continues, and today a declining percentage of personal income in California is directed to K-12 education.  A 2005 study by the Rand Corporation concluded: As recently as the 1970s, California’s public schools were considered to be among the nation’s best. Today, however, there is widespread recognition that the schools are no longer top performers. As a consequence, many Californians share a growing sense of alarm about the ineffectiveness of their public education system and the generation of children whose educational needs are not being met.”[1]

This is a dismal assessment. As a former California resident who experienced firsthand the inadequacies of K-12 education in the state I don’t want to appear to be endorsing the gutting of public schools, but the 30-year decline in quality of California’s K-12 public school system had one positive effect on innovation in Silicon Valley, because there was a consequence of Prop 13 that no one could have foreseen.  It helped to flatten what could have easily become an exceedingly hierarchical technology community into a more or less free-flowing social network.

Engineers of all stripes who want quality education for their kids have only two alternatives. They can either fork over a lot of money to a private school or move into a more affluent community where parent associations can raise extra dollars to supplement inadequate public funding.  In both cases, engineers find themselves elbow-to-elbow with industry executives, entrepreneurs, venture capitalists, and professors.  This is one way worlds are prevented from colliding in Silicon Valley.  It’s hard to maintain a strict hierarchy when – as they were in our local elementary school — CFO’s and programmers are working together on the PTA’s next silent auction.  Technologists and business leaders attend the same football games and school plays.  They mingle at holiday programs and parties and first-day-of-school orientations.

Of course, it’s not just schools that flatten the hierarchies of the Northern California technology community.  A young VLSI designer with a newly minted degree from Michigan might find himself seated behind former Sun CEO Scott McNealy at a San Jose Sharks hockey game because McNealy’s seats are in the stands, not a glassed-in corporate box. Sand Hill Road runs for four miles behind the Stanford University campus, so it is not unusual to see a partner in a legendary venture firm wandering the halls of the Gates Building and striking up a discussion with whatever graduate student happens by.  Technology innovators and business leaders serve together on boards of the Tech Museum and the Computer History Museum and the Exploratorium.  The excellent cafeteria at Google’s main Mountain View campus is a virtual soup of corporate leaders, academic celebrities, and undergraduate interns.  There are legendary meeting places.  Il Fornaio in Palo Alto serves breakfast, and sometimes a chance meeting at 9AM can turn into scribbles on napkin that in turn catch the attention of a retired Intel executive at the next table who is happy to spend a few minutes coaching the founders of a new startup.

The definitive answer to why this open culture is a competitive advantage can be found in Annalee Saxenian’s 1995 study of innovation Regional Advantage.[2] Everyone who is serious about building a culture of success should read it, and I am constantly amazed at the number of people leading strategic regional initiatives who are unaware of its existence.  In comparing the economic performance of Silicon Valley on the one hand and Boston’s Route 128 corridor on the other hand, Saxenian notes that social mixing is just one part of an open system of exchange that has not been successfully duplicated in business cultures where vertical integration and clear boundaries are common.  Decade after decade, the blurring of boundaries in Silicon Valley has given it an advantage in the rate of new start-ups and the speed with which new products can be brought to market.

Bill Hewlett and Dave Packard were to some extent responsible for an open corporate culture that welcomed startups even from within the company’s ranks.  While rummaging through some files one day at HP, I came across a series of memos from Apple co-founder Steve Wozniak.  On April 28, 1976, Wozniak wrote: ”I am seeking a written release from HP to market a product based on circuits I designed over the last year.  The circuits were originally designed on my personal time for personal use (hobby)…I “lobbied” for a similar product idea within HP management…without success…I have no objection to licensing the circuits to HP if necessary for any reason.”

A few days later, HP’s General Counsel, replied: “We are happy to release this invention to you subject to a worldwide royalty-free license to Hewlett-Packard Company and its present licensees…”

Wozniak and Steve Jobs set up camp nearby and became part of an innovative explosion that benefited HP and the entire industry.

Digital Equipment Corporation was the closest thing to HP that existed on Route 128, but like many other local businesses its corporate culture was far less open to sharing intellectual property, information, and skills. When Jeffrey Kalb left Digital in 1987 to found a new computer company called MasPar, it was a blow to DEC.  Kalb moved from Boston to Silicon Valley and by implication away from Digital.

Even at this late date, it is still a subject of considerable interest in northern New Jersey, Atlanta, Austin, Raleigh, and Minneapolis how to recreate the innovative environment of California’s Route 101. These are all regions with great universities, access to capital and a track record of building successful businesses.  Atlanta leads in many of the traditional measures of innovation but today lacks even one major source of venture capital. New Jersey was the intellectual center of the telecommunications industry, but there is a wide social gulf between the remaining scientists at the central research labs and the gated mansions of Bedminster.  Like Route 128, Austin, Raleigh and Minneapolis grew around companies with hierarchical cultures. A lesson of looking at things through the WWC lens is that innovation works better when worlds are shared.  Easy social mixing – whether spurred by a common concern for local schools or simply blurred horizontal and vertical boundaries – builds trust and collaborative networks.

In case you think all this talk about culture is some sort of gauzy way to paint contrasts where none really exist, Jeffrey Kalb pointed out one of the enduring business advantages of shared worlds: “There are a large number of experienced people [in Silicon Valley] who have retired but are still active in the industry and are available as consultants, members of boards or directors or venture capitalists…There’s just about anything you want in this infrastructure.”

To the extent that large corporations mimic entire societies, there are sociological reasons why sharing worlds is important for innovation.  Open innovation helps, too.  More about these ideas in later posts.

[1] California’s K–12 Public Schools: How Are They Doing? By Stephen J. Carroll, Cathy Krop, Jeremy Arkes, Peter A. Morrison, Ann Flanagan, RAND Corporation, 2005.

[2] Regional Advantage by Analee Saxenian, Harvard University Press, 1994 (Revised 1995)


3 Responses to “Proposition 13 and Innovation”

  1. […] resources in determining the long-term health of  industries in a region.  Since I devoted my first post to exploring the impact of fluid social mixing on the Silicon Valley culture, I thought it would be […]

  2. […] market adjacencies. Some things were lost over the next couple of decades.  At least, there is no indication that Steve Wozniak’s management was inclined to create a spin-out to  give “HP a chance […]

  3. […] resources in determining the long-term health of  industries in a region.  Since I devoted my first post to exploring the impact of fluid social mixing on the Silicon Valley culture, I thought it would be […]

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