Recently I’ve been re-reading Peter Hall’s magisterial “Cities in Civilization.” It’s a huge doorstopper of a book, the majority of which is histories of cities’ Golden Ages. Artistic, technological, civic, and so on.
One of the histories is of Silicon Valley.
And if there is anything which is clear from that history it is that Silicon Valley could not exist if California allowed non-competes. Silicon Valley’s history is of people working for one firm, leaving and starting up a new company which directly competed with that firm. Fairchild Semiconductor was famous, or infamous for this, and among its children is the company Intel.
Non-competes are, well, non-competitive. The idea that someone should be locked out from doing what they know best just because it might hurt a previous employer is radically non-capitalistic.
Oh, there’s other stuff, of course. Like a lot of technological golden age cities, SV is a child of government and university. At the key stage of computer development, government was buying about half of all computers, and in effect paying the entire R&D budget of Silicon Valley. Likewise, without Stanford, there is no Silicon Valley.
But the engine that kept Silicon Valley going was that anyone could leave their current employer and start up a firm competing with them.
If your laws allow non-competes, you will not be the next Silicon Valley. Doesn’t mean you can’t be the next, say, Berlin (the core of the electrical revolution), or the next Detroit (er, back when that meant something good), but you won’t have what Silicon Valley did.
I do wonder, myself, if Silicon Valley can survive after having off-shored most of its production. Historically, that doesn’t tend to go very well. At first it doesn’t matter, as when Britain off-shored production to the US, and still produced the majority of new inventions. But eventually there is a drop off. Having the factory where the designers are seems to matter.
Perhaps that’s changed, but real change of fundamentals like that is rare.
We’ll see.
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Eric Anderson
Whereas libertarians will defend noncompetes on the basis of freedom of contract arguing that we’re all better off for it.
Though, it’s a funny thing: you rarely see people with “capital” entering noncompete contracts.
Witness the typical black letter law standard used to determine enforceability by a court:
Is the restriction reasonably necessary to protect the employer?
Is the restriction reasonable in terms of time limitation?
Is the restriction reasonable in geographic scope?
Is the restriction unduly hard on the employee?
Does the restriction violate public policy?
Obviously the bar to clear these standards is low in many states or so many noncompete agreements would not exist. But in my mind, the final kick in the worker’s face is the “public policy” standard. Courts generally recognize that a noncompete violates public policy if it creates a shortage of the services that the employee provides or creates a monopoly.
However, there is another established public policy concept in contract law called “unconscionability,” generally stating:
“When a party is wrongly induced to enter into the contract or if the terms are grossly unfair to one party, the contract may not be enforced by the court. This usually occurs when one party is in a much stronger bargaining position than the other party. Often, the stronger party will know that the weaker party is unable to reasonably protect his interests and the resulting contract may be unconscionable and a court may determine it to be invalid.”
Oh, you mean like an employer/employee — capitalist/worker kinda context? One party is NEVER in a stronger or weaker bargaining position in those contexts, right? But somehow, this public policy (that caselaw generally significantly narrows anyway) doesn’t come up in the review of noncompetes.
And of course, adding insult to injury, is the unbalanced employer/employee — capitalist/worker relationship to the court enforcing the contract.
Fun fact, the person who can afford to hire the most lawyers almost always wins.
But yeah, sure. Capitalism is all about open free and open competition.
Larry Y
As unique as Silicon Valley is, it stands on the shoulders of industrial research labs. One of them was located nearby, Xerox PARC. Another has won multiple Nobel Prizes, and created everything from transistors to C programming language to information theory. Maybe Bell Labs is a true unicorn, but no one seems to talk about it outside of nostalgia.
bruce wilder
Not Detroit either I think in the first two decades of the 20th century, its most inventive time.
john repko
Andy Grove wrote the book (well, the *article*) on why having a factory where the designers are matters: Andy Grove – How America Can Create Jobs
economicator
Very important takeaway – that non-competes are radically non-capitalistic. Thank you for that.
I have a side question, sorry for my ignorance on this: how is Berlin related to the core of the electrical revolution? Electrification? Not US? Are we talking late 19th century? I was just surprised to see this reference and could not relate it to anything I know. Would be good to get a clarification.
Thanks!
marku52
When I was with HP ( in the bad Carly days) they would bring in speakers to discuss issues regarding product development. One they brought in had investigated Toyota’s “lean” development process and written a book. This was to emphasize how we were to thin out our development process.
However, we had just got done with outsourcing manufacturing to Asia (we literally were told “just assume labor is free” in costing estimates) (FREE mind you)
So I asked this fellow if Toyota would ever separate engineering from manufacturing, and he sheepishly (looking at his HP handler) said “No, never”
Ah well then.