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April 15, 2014

Arc Lights Leapfrogged Gas Lights Before Incandescents Leapfrogged Them Both



(p. 85) The gas interests had been dealt a number of recent setbacks even before Edison's announcement of a newly successful variant of electric light. An "enormous abandonment of gas" by retail stores in cities, who now could use less expensive kerosene, was noticed. The shift was attributed not to stores' preference for kerosene but as a means of escaping "the arrogance of the gas companies." Arc lights had now become a newly competitive threat, too. The previous month, Charles Brush had set up his lights in an exhibition hall in New York and then added a display in Boston. Sales to stores followed in several cities; then, as word spread, other establishments sought to obtain the cachet bestowed by the latest technology. William Sharon, a U.S. senator for and energetic booster of California, retrofitted the public spaces of his Palace Hotel in San Francisco with arc lights that replaced 1,085 gas jets.


Source:

Stross, Randall E. The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World. New York: Crown Publishers, 2007.






April 11, 2014

Edison, Not Antitrust, Reduced Power of Hated Gas Monopolies




Counterbalancing the angst of those hurt by the death of an old technology is sometimes the triumph creative destruction provides to those who were less well-served by the old technology. Some look to governments to restrain a dominant technology; but sometimes a more effective way is to replace the old technology through creative destruction's leapfrog competition.


(p. 84) Gaslight monopolies had few friends outside of the ranks of shareholders. At the beginning of the nineteenth century, gaslight had been viewed as pure and clean; seventy years later, its shortcomings had become all too familiar: it was dirty, soiled interior furnishings, and emit-(p. 85)ted unhygienic fumes. It was also expensive, affordable for indoor lighting only in the homes of the wealthy, department stores, or government buildings. The New York Times almost spat out the following description of how gas companies conducted business: "They practically made the bills what they pleased, for although they read off the quantity by the meter, that instrument was their own, and they could be made to tell a lie of any magnitude.... Everybody has always hated them with a righteous hatred."

Edison credited the gas monopoly for providing his original motivation to experiment with electric light years before in his Newark laboratory. Recalling in October 1878 his unpleasant dealings years earlier with the local gas utility, which had threatened to tear out their meter and cut off the gas, Edison said, "When I remember how the gas companies used to treat me, I must say that it gives me great pleasure to get square with them." The Brooklyn Daily Eagle printed an editorial titled "Revenge Is Sweet" in which it observed that the general public greatly enjoyed the discomfort of the gas companies, too: "To see them squirm and writhe is a public satisfaction that lifts Edison to a higher plane than that of the wonderful inventor and causes him to be regarded as a benefactor of the human race, the leading deity of popular idolatry."



Source:

Stross, Randall E. The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World. New York: Crown Publishers, 2007.

(Note: ellipsis in original.)






April 7, 2014

William Vanderbilt Helped Disrupt His Gas Holdings by Investing in Edison's Electricity



(p. 84) But even the minimal ongoing work on the phonograph would be pushed aside by the launch of frenzied efforts to find a way to fulfill Edison's premature public claim that his electric light was working. A couple of months later, when asked in an interview about the state of his phonograph, Edison replied tartly, "Comatose for the time being." He changed metaphors and continued, catching hold of an image that would be quoted many times by later biographers: "It is a child and will grow to be a man yet; but I have a bigger thing in hand and must finish it to the temporary neglect of all phones and graphs."

Financial considerations played a part in allocation of time and resources, too. Commissions from the phonograph that brought in hundreds of dollars were hardly worth accounting for, not when William Vanderbilt and his friends were about to advance Edison $50,000 for the electric light. Edison wrote a correspondent that he regarded the financier's interest especially satisfying as Vanderbilt was "the largest gas stock owner in America."



Source:

Stross, Randall E. The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World. New York: Crown Publishers, 2007.

(Note: ellipses, and capitals, in original.)






February 7, 2014

"Innovation" Word "Is Way Over-Used"



PeanutButterPopTarts2014-01-17.png Source of Pop-Tarts image: http://cdn.foodbeast.com.s3.amazonaws.com/content/wp-content/uploads/2013/05/poptarts.png



(p. B1) It measures nearly 3 inches by 5 inches, and it's made from enriched flour, corn syrup and creamy peanut butter.

This is Kellogg's Gone Nutty! peanut butter Pop-Tart. If you agree with Kellogg CEO John Bryant, it's one of the cereal company's important products of 2013. He went so far as to call it an innovation.

Listen to the chiefs of America's biggest companies, and you'll find the Gone Nutty! Pop-Tart has plenty of company. Most CEOs now spray the word "innovation" as if it were an air freshener. A little spritz can't hurt.

In the last three months, CEOs of S&P 500 companies have put the "innovation" word on Peony & Blush Suede perfume, premium potash and higher-alcohol Miller beer. "Innovation" also describes Dun & Bradstreet credit reports and PetSmart's temporary tattoos for pets.

Back in 2007, 99 companies in the S&P 500 mentioned innovation in their third-quarter conference calls, according to reviews of transcripts from Capital IQ. This year the number was 197.

When Boston Consulting Group asked 1,500 executives to rank their company innovation from 1-10, more than two-thirds rated themselves a seven or higher.

The word "is way overused," says International Paper CEO John Faraci.


. . .


(p. B8) As for the peanut butter Pop-Tarts, a Kellogg spokeswoman says that it had long been one of the most-requested new flavors.

"Development challenges and nut-allergy concerns stood in the way of launching this innovation. Since its launch, Pop-Tarts Gone Nutty has exceeded our expectations."

There's nothing wrong with keeping pace. It's what companies must do. But it's worth asking at your company, no matter what words the CEO uses: Where does survival end
and real innovation begin?



For the full commentary, see:

DENNIS K. BERMAN. "THE GAME; Is a Peanut Butter Pop-Tart an Innovation?" The Wall Street Journal (Weds., December 4, 2013): B1 & B8.

(Note: ellipsis added.)

(Note: the online version of the commentary has the date December 3, 2013.)






January 12, 2014

In 20th Century, Inventions Had Cultural Impact Twice as Fast as in 19th Century



NgramGraphTechnologies2013-12-08.png I used Google's Ngram tool to generate the Ngram above, using the same technologies used in the Ngram that appeared in the print (but not the online) version of the article quoted and cited below. The blue line is "railroad"; the red line is "radio"; the green line is "television"; the orange line is "internet." The search was case-insensitive. The print (but not the online) version of the article quoted and cited below, includes a caption that describes the Ngram tool: "A Google tool, the Ngram Viewer, allows anyone to chart the use of words and phrases in millions of books back to the year 1500. By measuring historical shifts in language, the tool offers a quantitative approach to understanding human history."



(p. 3) Today, the Ngram Viewer contains words taken from about 7.5 million books, representing an estimated 6 percent of all books ever published. Academic researchers can tap into the data to conduct rigorous studies of linguistic shifts across decades or centuries. . . .

The system can also conduct quantitative checks on popular perceptions.

Consider our current notion that we live in a time when technology is evolving faster than ever. Mr. Aiden and Mr. Michel tested this belief by comparing the dates of invention of 147 technologies with the rates at which those innovations spread through English texts. They found that early 19th-century inventions, for instance, took 65 years to begin making a cultural impact, while turn-of-the-20th-century innovations took only 26 years. Their conclusion: the time it takes for society to learn about an invention has been shrinking by about 2.5 years every decade.

"You see it very quantitatively, going back centuries, the increasing speed with which technology is adopted," Mr. Aiden says.

Still, they caution armchair linguists that the Ngram Viewer is a scientific tool whose results can be misinterpreted.

Witness a simple two-gram query for "fax machine." Their book describes how the fax seems to pop up, "almost instantaneously, in the 1980s, soaring immediately to peak popularity." But the machine was actually invented in the 1840s, the book reports. Back then it was called the "telefax."

Certain concepts may persevere, even as the names for technologies change to suit the lexicon of their time.



For the full story, see:

NATASHA SINGER. "TECHNOPHORIA; In a Scoreboard of Words, a Cultural Guide." The New York Times, SundayBusiness Section (Sun., December 8, 2013): 3.

(Note: ellipsis added; bold in original.)

(Note: the online version of the article has the date December 7, 2013.)






December 3, 2013

Amazon's Story of the Evolution and Revolution of Disruptive Innovation



EverythingStoreBK2013-10-29.jpg

















Source of book image:
http://i1.wp.com/allthingsd.com/files/2013/10/Stone_EverythingStore1.jpg



(p. C5) Mr. Stone, a senior writer for Bloomberg Businessweek and a former reporter for The New York Times, tells this story of disruptive innovation with authority and verve, and lots of well-informed reporting. Although "The Everything Store" retraces early ground covered by Robert Spector's 2000 book, "Amazon.com: Get Big Fast," Mr. Stone has conducted more than 300 interviews with current and former Amazon executives and employees, including conversations, over the years, with Mr. Bezos, who "in the end was supportive of this project even though he judged that it was 'too early' for a reflective look" at the company.

"The Everything Store" does not examine in detail the fallout that Amazon's rise has had on book publishing and on independent bookstores, but Mr. Stone does a nimble job of situating the company's evolution within the wider retail landscape and within the technological revolution that was remaking the world at the turn of the millennium.



For the full review, see:

MICHIKO KAKUTANI. "BOOKS OF THE TIMES; Selling as Hard as He Can." The New York Times (Tues., October 29, 2013.): C1 & C5.

(Note: the online version of the review has the date October 28, 2013.)


The book under review is:

Stone, Brad. The Everything Store: Jeff Bezos and the Age of Amazon. New York: Little, Brown and Company, 2013.


StoneBrad2013-10-29.jpg










"Brad Stone" Source of caption and photo: online version of the NYT review quoted and cited above.







November 29, 2013

Kerosene Creatively Destroyed Whale Oil



WhaleOilLamps2013-10-25.jpg "The whale-oil lamps at the Sag Harbor Whaling and Historical Museum are obsolete, though at one time, whale oil lighted much of the Western world." Source of caption and photo: online version of the NYT article quoted and cited below.



(p. 20) Like oil, particularly in its early days, whaling spawned dazzling fortunes, depending on the brute labor of tens of thousands of men doing dirty, sweaty, dangerous work. Like oil, it began with the prizes closest to home and then found itself exploring every corner of the globe. And like oil, whaling at its peak seemed impregnable, its product so far superior to its trifling rivals, like smelly lard oil or volatile camphene, that whaling interests mocked their competitors.

"Great noise is made by many of the newspapers and thousands of the traders in the country about lard oil, chemical oil, camphene oil, and a half-dozen other luminous humbugs," The Nantucket Inquirer snorted derisively in 1843. It went on: "But let not our envious and -- in view of the lard oil mania -- we had well nigh said, hog-gish opponents, indulge themselves in any such dreams."

But, in fact, whaling was already just about done, said Eric Jay Dolin, who . . . is the author of "Leviathan: The History of Whaling in America." Whales near North America were becoming scarce, and the birth of the American petroleum industry in 1859 in Titusville, Pa., allowed kerosene to supplant whale oil before the electric light replaced both of them and oil found other uses.


. . .


Mr. Dolin said the message for today was that one era's irreplaceable energy source could be the next one's relic. Like whaling, he said, big oil is ripe to be replaced by something newer, cleaner, more appropriate for its moment.



For the full story, see:

PETER APPLEBOME. "OUR TOWNS; Once They Thought Whale Oil Was Indispensable, Too." The New York Times, First Section (Sun., August 3, 2008): 20.

(Note: ellipses added.)

(Note: the online version of the story has the title, "OUR TOWNS; They Used to Say Whale Oil Was Indispensable, Too.")


Dolin's book is:

Dolin, Eric Jay. Leviathan: The History of Whaling in America. New York: W. W. Norton & Company, Inc., 2007.






November 22, 2013

Pretentious Studios Were Pushed Aside by Grounded Googlers



(p. 261) Kamangar didn't put a value judgment on the way the labels and studios worked but tried to crack their code, talking to executives, producers, agents, and managers. One day he happened to be in New York and was invited to meet with the CEO of Universal Music Group, Doug Morris. Kamangar was escorted by bodyguards to a private elevator and ushered to a fancy office high above the city. He couldn't help thinking of the contrast with Google, where you stumbled in and went to the microkitchen for coffee. Kamangar didn't dwell on the (p. 262) irony that it was the scruffy kids in shorts, munching energy bars and writing analytics programs, who were pushing aside the old power structure. While he put the pieces of YouTube together, though, he always kept in mind that he was documenting a traditional media system on the verge of collapse. He had to deal with the music world as it was but also plan for the way it would be after disruptions, which Google and YouTube were accelerating.


Source:

Levy, Steven. In the Plex: How Google Thinks, Works, and Shapes Our Lives. New York: Simon & Schuster, 2011.






November 19, 2013

Booker Bravely Boosted Bain



MurphyAndBookerMeetThePress2010-10-25.jpg "Cory A. Booker, right, the Democratic mayor of Newark, on "Meet the Press" with Mike Murphy, a Republican strategist. "Enough is enough," Mr. Booker said of attacks in the presidential race." Source of caption and photo: online version of the NYT article quoted and cited below.



Romney was criticized for his past association with Bain Capital which was criticized for its role in the process of creative destruction. Democrat Cory Booker, to his credit, defended Bain. (But to his discredit, he later went wobbly when fellow Democrats were appalled by his defense.)


(p. A15) Mayor Cory A. Booker of Newark, a prominent Democrat enlisted as a surrogate for President Obama's campaign, sharply criticized it on Sunday for attacking Mitt Romney's work at the private equity firm Bain Capital.

Mr. Booker, speaking on the NBC program "Meet the Press," made his comments in response to a television advertisement the president's campaign unveiled last week. It portrays Mr. Romney, the presumptive Republican presidential nominee, as someone who eliminated jobs for the sake of profits during his years running Bain Capital.

"I have to just say, from a very personal level, I'm not about to sit here and indict private equity," Mr. Booker said. "To me, it's just we're getting to a ridiculous point in America, especially that I know I live in a state where pension funds, unions and other people are investing in companies like Bain Capital. If you look at the totality of Bain Capital's record, they've done a lot to support businesses, to grow businesses. And this to me, I'm very uncomfortable with."



For the full story, see:

RAYMOND HERNANDEZ. "Newark Mayor Criticizes Obama's Ad." The New York Times (Mon., May 21, 2012): A15.

(Note: the online version of the article has the date May 20, 2012, and has the title "Surrogate for Obama Denounces Anti-Romney Ad.")






November 13, 2013

Greenspan's Epiphany: As Entitlements Rise, Savings Fall



TheMapAndTheTerritoryBK2013-10-24.jpg











Source of book image: http://s.wsj.net/public/resources/images/BN-AB661_bkrvgr_GV_20131021130523.jpg







(p. C11) In his new book "The Map and the Territory," to be released on Tuesday, Mr. Greenspan, 87, goes on a hunt for what has gone wrong in American politics and in the U.S. economy.


. . .


Mr. Greenspan's biggest revelation came one day about a year ago when he was playing with gross domestic savings numbers. What he found, to his surprise and initial skepticism, was that an increase in entitlements has closely corresponded to a decline in the country's savings. "We had this extraordinary increase in benefits, with each party trying to outbid the other," he says. "That practice has been eroding the country's flow of savings that's so critical in financing our capital investment." The decline in savings has been partly offset by borrowing from abroad, which brings us to our current foreign debt: "$5 trillion and counting," he says.


. . .


Studying the minutiae of the events leading to the financial crisis brought to mind some lessons from his famous friendship, from the 1950s on, with the late Objectivist philosopher Ayn Rand.


. . .


Mr. Greenspan then believed in analysis based mainly on hard science and empirical facts. Rand told him that unless he considered human nature and its irrational side, he would "miss a very large part of how human beings behaved." At the time they weren't discussing economics, but today he realizes the full impact of emotions and instincts on markets. He also has come to admire psychologist and Princeton University professor emeritus Daniel Kahneman's work applying psychological insights to economic theory, for which he won a Nobel Prize in 2002.


. . .


With his new book, Mr. Greenspan hopes to provide politicians and the public with a road map to avoid making the same mistakes again. His suggestions include reducing entitlements, embracing "creative destruction" by letting facilities with cutting-edge technology displace those with low productivity, and fixing the political system by encouraging bipartisanship.



For the full interview/review, see:

ALEXANDRA WOLFE, interviewer/reviewer. "WEEKEND CONFIDENTIAL; Alan Greenspan." The Wall Street Journal (Sat., Oct. 19, 2013): C11.

(Note: ellipses added.)

(Note: the online version of the interview/review has the date Oct. 18, 2013, and has the title "WEEKEND CONFIDENTIAL; Alan Greenspan: What Went Wrong; The former Fed chairman on where the economy went wrong, where he went wrong--and Ayn Rand.")



The book discussed is:

Greenspan, Alan. The Map and the Territory: Risk, Human Nature, and the Future of Forecasting. New York: Penguin Press, 2013.






October 31, 2013

After 25 Years of Government Harassment, A&P Was Finally Allowed to Lower Prices for Consumers




The two main types of creative destruction are: 1.) new products and 2.) process innovations. Much has been written about the new product type; much less about the process innovation type. Marc Levinson has written two very useful books on process innovations that are important exceptions. The first is The Box and the second is The Great A&P.


(p. A13) A prosecutor in Franklin Roosevelt's administration called it a "giant blood sucker." A federal judge in Woodrow Wilson's day deemed it a "monopolist," and another, during Harry Truman's presidency, convicted it of violating antitrust law. The federal government investigated it almost continuously for a quarter-century, and more than half the states tried to tax it out of business. For its strategy of selling groceries cheaply, the Great Atlantic & Pacific Tea Company paid a very heavy price.


. . .


A&P was Wal-Mart long before there was Wal-Mart. Founded around the start of the Civil War, it upset the tradition-encrusted tea trade by selling teas at discount prices by mail and developing the first brand-name tea. A few years later, its tea shops began to stock spices, baking powder and canned goods, making A&P one of the first chain grocers.

Then, in 1912, John A. Hartford, one of the two brothers who had taken over the company from their father, had one of those inspirations that change the course of business. He proposed that the company test a bare-bones format at a tiny store in Jersey City, offering short hours, limited selection and no home delivery, and that it use the cost savings to lower prices. The A&P Economy Store was an instant success. The Great A&P was soon opening one and then two and then three stores per day. By 1920, it had become the largest retailer in the world.


. . .


While shoppers flocked to A&P's 16,000 stores, small grocers and grocery wholesalers didn't share their enthusiasm. The anti-chain-store movement dates back at least to 1913, when the American Fair-Trade League pushed for laws against retail price-cutting.


. . .


Thanks in good part to the Hartfords' tenacity, the restraints on discount retailing began to fade away in the 1950s. Chain-store taxes were gradually repealed, and state laws limiting price competition to protect mom and pop were taken off the books. By 1962, when Wal-Mart, Target, Kmart, and other modern discount formats were born, the pendulum had swung in consumers' favor.



For the full commentary, see:

MARC LEVINSON. "When Creative Destruction Visited the Mom-and-Pops; The A&P grocery company may be nearing its sell-by date, but a century ago it was a fresh, revolutionary business." The Wall Street Journal (Sat., Oct. 12, 2013): A13.

(Note: ellipses added.)

(Note: the online version of the commentary has the date Oct. 11, 2013, and had the title "Marc Levinson: When Creative Destruction Visited the Mom-and-Pops; The A&P grocery company may be nearing its sell-by date, but a century ago it was a fresh, revolutionary business.")


Levinson's book on A&P is:

Levinson, Marc. The Great A&P and the Struggle for Small Business in America. New York: Hill and Wang, 2011.






October 27, 2013

Silicon Valley Is Open to Creative Destruction, But Tired of Taxes



(p. A15) Rancho Palos Verdes, Calif.

When the howls of creative destruction blew through the auto and steel industries, their executives lobbied Washington for bailouts and tariffs. For now, Silicon Valley remains optimistic enough that its executives don't mind having their own businesses creatively destroyed by newer technologies and smarter innovations. That's an encouraging lesson from this newspaper's recent All Things Digital conference, which each year attracts hundreds of technology leaders and investors.


. . .


In a 90-minute grilling by the Journal's Walt Mossberg and Kara Swisher, Apple Chief Executive Tim Cook assured the audience that his company has "some incredible plans that we've been working on for a while."

Mr. Cook's sunny outlook was clouded only by his dealings with Washington. He was recently the main witness at hearings called by Sen. Carl Levin, a Michigan Democrat, who accused Apple of violating tax laws. In fact, Apple's use of foreign subsidiaries is entirely legal--and Apple is the largest taxpayer in the U.S., contributing $6 billion a year to the government's coffers.

Mr. Cook put on a brave face about the hearings, saying, "I thought it was very important to go tell our side of the story and to view that as an opportunity instead of a pain in the [expletive]." Mr. Cook's foul language was understandable. "Just gut the [tax] code," he told the conference. "It's 7,500 pages long. . . . Apple's tax return is two feet high. It's crazy."

When the audience applauded, Ms. Swisher quipped, "All right, Rand Paul." A woman shouted: "No, I'm a Democrat!" One reason the technology industry remains the center of innovation may be that many technologists of all parties view trips to Washington as a pain.



For the full commentary, see:

L. GORDON CROVITZ. "INFORMATION AGE; Techies Cheer Creative Destruction." The Wall Street Journal (Mon., June 3, 2013): A15.

(Note: ellipsis between paragraphs added; italics in original; ellipsis, and bracketed words, within next-to-last paragraph, in original.)

(Note: the online version of the commentary has the date June 2, 2013.)






October 22, 2013

Dohrmann and Quevedo Survive Creative Destruction of Inacom



DohrmannHokampQuevedoCosentry2013-10-07.jpg "Cosentry, an Omaha-based provider of data center storage and managed technology services, has a new CEO, Brad Hokamp, center. With him at the Cosentry data center in Papillion are company founders Kevin Dohrmann, left, and Manny Quevedo." Source of caption and photo: online version of the Omaha World-Herald article quoted and cited below.


Innovation through creative destruction brings us the new products and processes that make our lives longer, richer and more satisfying. The major downside of creative destruction is the job loss of those working for firms that are creatively destroyed. Sometimes, in class, I use Omaha's Inacom as a concrete example. Inacom was a value-added retailer of computer equipment. They would buy PCs from IBM, Compaq and the like, then add software and hardware, and re-sell and install for firms, at a mark-up. They were creatively destroyed by Dell's process innovation of customizing and selling direct, at much lower prices than Inacom charged. When I arrived in Omaha, Inacom was one of a handful of Fortune 500 firms. Now Inacom is gone. But just because a firm is creatively destroyed does not imply that all those who worked for the firm are creatively destroyed. Dohrmann and Quevedo were executives at Inacom. They had the skills, knowledge, resilience and work ethic to create their own entrepreneurial startup that has thrived. Not everyone can do what Dohrmann and Quevedo did. But everyone should be able to improve their skills, knowledge, resilience, and work ethic, so that if creative destruction destroys the firm that employs them, they will still survive and possibly thrive.


(p. 1D) Cosentry's regional data center footprint has grown far from its "humble beginnings" 12 years ago of just 4,000 square feet in the old Southroads Mall in Bellevue.

"Everyone saw it as a mall that was in deterioration, and I walked in and saw the most beautiful building in Omaha," co-founder Manny Quevedo said, (p. 3D) remembering solid walls and below-grade space for computer systems.

Investments from Omaha firms Waitt Co. and McCarthy Capital along the way helped the firm grow; it was sold in 2011 to Boston private equity firm TA Associates but still has its headquarters at 127th Street and West Dodge Road.


. . .


The company's workforce has approximately doubled in the last five years to nearly 200, more than half of them in Nebraska, and will continue to grow gradually with the expansion as Cosentry hires more engineers and technicians, Quevedo said.

Today the company has six data centers, including two each in the Kansas City and Sioux Falls, S.D., metropolitan areas. If you use utilities or health care services or do any shopping or banking in the region, there's a chance some of your information has been stored or processed through Cosentry's servers.

Cosentry started with what Quevedo said was a handful of clients and grew to hundreds within its first five years.


. . .


(p. 3D) Cosentry Timeline

2001: With investment from Waitt Co., Cosentry is started by Manny Quevedo and Kevin Dohrmann, former employees of InaCom, the former Omaha Fortune 500 computer dealer that began as a division of Valmont Industries but merged with VanStar of Atlanta in 2000 and later declared bankruptcy. Cosentry creates a data center in Bellevue.

2005: Cosentry, also called IPR Inc., sold its IP Revolution division to a Kansas firm, Choice Solutions. IP Revolution sold voice and data communications services and systems. Cosentry doubles the size of its Bellevue data center and expands to the Kansas City and Sioux Falls, S.D., markets.

2008: Omaha investment firm McCarthy Capital invests in the firm. At the time, Cosentry had 95 employees.

2010: Cosentry cuts the ribbon on the $26 million Midlands Data Center in Papillion, a joint project with Alegent Health, which uses the center to store electronic medical records.

2011: Boston investment firm TA Associates buys Cosentry for an undisclosed amount from McCarthy and Waitt. The local management team continues to operate and have an ownership stake in Cosentry. The firm expands with second data centers in both the Sioux Falls and Kansas City markets.

2013: Cosentry refinances its credit facilities to provide up to $100 million to enable expansion, including the expansion of the Midlands Data Center. Today, Cosentry has nearly 200 employees and six data centers in three metropolitan areas.



For the full story, see:

Barbara Soderlin. "A Growing Tech Footprint: As Businesses' Data Storage Needs Expand, Cosentry Adds to Its Papillion Center." Omaha World-Herald (MONDAY, AUGUST 26, 2013): 1D & 3D.

(Note: ellipses added; bold in original print version of article.)

(Note: the online version of the article has the title "As Businesses' Data Storage Needs Expand, Cosentry Adds to Its Papillion Center.")




CosentryScottCappsAtPapillionDataCenterCoolingSystem2013-10-07.jpg






"Scott Capps of Cosentry's Papillion data center with the cooling system that helped Cosentry earn an Energy Star certification, which is given by the Environmental Protection Agency based on energy efficiency and lower emissions. It's the only data center in Nebraska with the certification." Source of caption and photo: the archive online version of the Omaha World-Herald article quoted and cited above.






August 23, 2013

"Better Coffee Rockefeller's Money Can't Buy"



BlackPageMortonAndHusbandWilliamBlack2013-08-04.jpg




"Page Morton Black, a cabaret singer, and William Black, the founder of the Chock Full o'Nuts company, in the early 1960s." Source of caption and photo: online version of the NYT article quoted and cited below.



(p. A17) For Gothamites of a certain vintage, it was . . . a part of life . . . -- a jaunty little waltz, its lyrics connoting warmth, fiscal security and celestial reward:


Chock Full o'Nuts is that heavenly coffee,

Heavenly coffee, heavenly coffee.

Chock Full o'Nuts is that heavenly coffee,

Better coffee a millionaire's money can't buy.



Page Morton Black, the cabaret singer whose sprightly rendition of that song in radio and television ads was indelibly engraved on New Yorkers' brains at midcentury, died on Sunday [July 21, 2013] at her home in the Premium Point enclave of New Rochelle, N.Y. She was 97.


. . .


Mrs. Black, the widow of William Black, the founder of the Chock Full o'Nuts company, curtailed her singing career after their marriage. But her voice lived on in the jingle, which was broadcast for more than 20 years.


. . .


The jingle's original last line, "Better coffee Rockefeller's money can't buy," was changed in 1957, after John D. Rockefeller Jr. and his family complained.


. . .


Chock Full o'Nuts, now owned by Massimo Zanetti Beverage USA, has revived the jingle, in a new arrangement, for its contemporary ads. The lyrics have been adjusted for inflation, with "billionaire" replacing "millionaire" in the last line.



For the full obituary, see:

MARGALIT FOX. "Page Morton Black, 97; Sang Heavenly Jingle." The New York Times (Tues., July 23, 2013): B3.

(Note: ellipses, and bracketed date, added; jingle italicized and indented in print version of obituary, by not online version.)

(Note: the online version of the obituary has the title "Page Morton Black, Who Sang Heavenly Jingle, Dies at 97.")






August 6, 2013

Steel Bankruptcies Led to Better Steel Industry Processes



(p. 3) A few years ago, an industry whose history and mythology were indelible parts of the American identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built this country, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction.


. . .


Yet steel's savior was not the government bailouts it ardently sought but exactly what it so long tried to avoid: bankruptcy. Only when the companies failed were they successfully slimmed down and retooled into smaller but profitable ventures.


. . .


Bethlehem Steel, whose steel was used in the Hoover Dam, the Chrysler building and the George Washington Bridge, filed for bankruptcy in October 2001. It was followed by National Steel, Weirton Steel, Georgetown Steel and many others. The pain was great.

And necessary, some say. "If the steel companies had gotten all they wanted in terms of loan guarantees and import quotas, they would never have gotten better," said Richard Fruehan, director of the Sloan Study on Competitiveness in the Steel Industry. "The bankruptcies forced their hand."



For the full commentary, see:

DAVID STREITFELD. "THE NATION; Is Steel's Revival a Model for Detroit?" The New York Times, Week in Review Section (Sun., November 23, 2008): 3.

(Note: ellipses added.)

(Note: the online version of the commentary is dated November 22, 2008.)






July 14, 2013

Record Companies Refused to See Efficiency of Napster Distribution System



AppetiteForSelfDestructionBK2013-07-13.jpg











Source of book image: online version of the WSJ review quoted and cited below.






(p. A15) . . . the central character in "Appetite for Self-Destruction" is technological change.


. . .


Record labels scrambled to negotiate with Napster and develop a legal version of the service with multiple revenue streams. The attempts all failed. In Mr. Knopper's telling, there were unreasonable demands on all sides. But he faults music executives for "cling[ing] to the old, suddenly inefficient model of making CDs and distributing them to record stores. . . . In this world, the labels controlled -- and profited from -- everything." In the new world being ushered in by Napster, he writes, control was shifting "to a snot-nosed punk and his crazy uncle."

The labels' inability to reach an agreement with Napster destroyed "the last chance for the record industry as we know it to stave off certain ruin," Mr. Knopper writes in a typically overheated passage. Had a deal been consummated, he suggests, a legal version of Napster might have generated revenues of $16 billion in 2002 and saved the industry. Whether or not the author's estimate is accurate, his larger point remains: The music industry's big mistake was trying to protect a business model that no longer worked. Litigation would not keep music consumers offline.



For the full review, see:

JEREMY PHILIPS. "BUSINESS BOOKSHELF; Spinning Out of Control; How the record industry missed out on a chance to compete in a new digital world." The Wall Street Journal (Weds., February 11, 2009): A15.

(Note: first two ellipses added; third ellipsis in original.)


The book under review is:

Knopper, Steve. Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age. New York: Free Press, 2009.






March 21, 2013

Unemployment Increases Risk of Heart Attack



As a defender of the process of innovation through creative destruction, I try to be alert to evidence on creative destruction's benefits and costs. The highest cost is usually viewed as technological unemployment. The evidence below will have to be examined and, if sound, added to the costs.


(p. D6) Unemployment increases the risk of heart attack, a new study reports, and repeated job loss raises the odds still more.


. . .


After adjusting for well-established heart attack risks -- age, sex, smoking, income, hypertension, cholesterol screening, exercise, depression, diabetes and others -- the researchers found that being unemployed also increased the risk of a heart attack, by an average of 35 percent.



For the full story, see:

NICHOLAS BAKALAR. "Job Loss Raises Threat of Heart Attack." The New York Times (Tues., November 27, 2012): D6.

(Note: ellipsis added.)

(Note: the online version of the story has the date November 26, 2012.)



The Dupre article mentioned above, is:

Dupre, Matthew E., Linda K. George, Guangya Liu, and Eric D. Peterson. "The Cumulative Effect of Unemployment on Risks for Acute Myocardial Infarction." Archives of Internal Medicine 172, no. 22 (Dec. 10, 2012): 1731-37.

(Note: the Archives of Internal Medicine has been re-named JAMA Internal Medicine.)






December 3, 2012

Business Cycles May Arise from "the Summation of Random Causes," Rather than from Creative Destruction



The Slutsky result summarized below would seem to imply that you can explain business cycles without fingering creative destruction as the culprit, as Schumpeter had seemed to do. The costs of creative destruction are thus reduced, and the case for creative destruction strengthened.


(p. 232) Phil Davies and Joe Mahon investigate "The Meaning of Slutsky." "A middleaged professor working at a Moscow think tank, [Eugen] Slutsky was virtually unknown to economists in Europe and the United States when he published his landmark paper on cyclical phenomena in 1927. In a bold statistical experiment, Slutsky demonstrated that random numbers subjected to statistical calculations similar to those used to reveal trends in economic time-series formed wavelike patterns indistinguishable from business cycles. The implication was that a similar stochastic process--'the summation of random causes,' as Slutsky described it--might be at work in the actual economy, causing prosperity to ebb and flow without the agency of sunspots, meteorological patterns or other cyclical forces. 'That was a hell of an idea,' said Robert Lucas, a University of Chicago economist who pioneered modern business cycle theory, in an interview. 'It was just a huge jump from what anyone had done.'


Source:

Taylor, Timothy. "Recommendations for Further Reading." Journal of Economic Perspectives 24, no. 2 (Spring 2010): 227-34.

(Note: bracketed name in original.)


The published version of the article summarized by Taylor is:

Davies, Phil, and Joe Mahon. "The Meaning of Slutsky." The Region (Dec. 2009): 13-17, 42-46.






November 29, 2012

Personal DNA Data, Smart Phones, and the Social Network Can Democratize Medicine



(p. 236) With the personal montage of your DNA, your cell phone, your social network---aggregated with your lifelong health information and physiological and anatomic data---you are positioned to reboot the future of medicine. Who could possibly be more interested and more vested in your data? For the first time, the medical world is getting democratized. Think of the priests before the Gutenberg printing press. Now, nearly six hundred years later, think of physicians and the creative destruction of medicine.


Source:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.






November 25, 2012

Progress Will Slow If Consumers Wait for Doctors to Creatively Destroy Medicine



(p. 195) . . . it remains unclear whether there is adequate plasticity of a plurality of physicians to embrace the digital world and acknowledge that the era of paternalism is passé. My sense is that young physicians who are digital natives will be likely to assimilate but that it will be quite difficult for the vast majority who are in practice and inculcated with an older idea of how medical care should be rendered. Eventually there will be enough digital native physicians to take charge, but that will take decades to be accomplished. In the meantime, consumers are fully capable of leading the movement and contributing to medicine's creative destruction. And so they must.


Source:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.

(Note: ellipsis added.)






November 9, 2012

"The Resistance from the Priesthood of Medicine Is at Its Height"



(p. 77) In December 2010 in Milwaukee, Wisconsin, Nicholas Volker, a five-year-old boy with a gastrointestinal condition that had not previously been seen, who had undergone over a hundred surgical operations and was almost constantly hospitalized and intermittently septic, was virtually on death's door. But when his DNA sequence was determined, his doctors found the culprit mutation. That discovery led to the proper treatment, and now Nicholas is healthy and thriving. Even though this was only the first clearly documented case of the life-saving power of human genomics in medicine, (p. 78) few could now deny that the field was going to have a vital role in the future of medicine. Some would argue that the treatment led to an even bigger breakthrough: health insurance coverage of sequencing costs for select cases.

It took the better part of a decade from the completion of the first draft of the Human Genome Project for genomics to reach the clinic in such a dramatic way. To make treatment like Volker's common will likely take more time still. Even if that's the ultimate prize, the creative destruction of medicine still has various other, less comprehensive, genomic tools for us to use, based on investigations of things like single-nucleotide polymorphisms, the exome, and more. The material can be a bit heady, but it's worth pushing through: these tools could effect not just dramatic corrections of faulty genes but a better, more scientific understanding of disease susceptibility and what drugs to take. Moreover, as they empower patients and democratize medicine, they make medical knowledge available to all and deep knowledge of ourselves available to each of us. Nevertheless, at this level, perhaps more than anywhere else in this ongoing medical revolution, the resistance from the priesthood of medicine is at its height. The fight might be tougher than the material, but in neither case can we afford to give up.



Source:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.






October 28, 2012

The Kairos of Creative Destruction in Medicine



Wikipedia tells us that "Kairos" "is an ancient Greek word meaning the right or opportune moment (the supreme moment)."


(p. x) With a medical profession that is particularly incapable of making a transition to practicing individualized medicine, despite a new array of powerful tools, isn't it time for consumers to drive this capability? The median of human beings is not the message. The revolution in technology that is based on the primacy of individuals mandates a revolution by consumers in order for new medicine to take hold.

Now you've probably thought "creative destruction" is a pretty harsh term to apply to medicine. But we desperately need medicine to he Schumpetered, to be radically transformed. We need the digital world to invade (p. xi) the medical cocoon and to exploit the newfound and exciting technological capabilities of digitizing human beings. Some will consider this to be a unique, opportune moment in medicine, a veritable once-in-a-lifetime Kairos.

This book is intended to arm consumers to move us forward.



Source:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.

(Note: italics in original.)






October 24, 2012

"Our World Has Been "Schumpetered""



"Schumpeter" is now a verb!


(p. v) In the mid-twentieth century Joseph Schumpeter, the noted Austrian economist, popularized the term "creative destruction" to denote transformation that accompanies radical innovation. In recent years, our world has been "Schumpetered." By virtue of the intensive infiltration of digital devices into our daily lives, we have radically altered how we communicate with one another and with our entire social network at once. We can rapidly turn to our prosthetic brain, the search engine, at any moment to find information or compensate for a senior moment. Everywhere we go we take pictures and videos with our cell phone, the one precious object that never leaves our side. Can we even remember the old days of getting film developed? No longer is there such a thing as a record album that we buy as a whole--instead we just pick the song or songs we want and download them anytime and anywhere. Forget about going to a video store to rent a movie and finding out it is not in stock. Just download it at home and watch it on television, a computer monitor, a tablet, or even your phone. If we're not interested in getting a newspaper delivered and accumulating enormous loads of paper to recycle, or having our hands smudged by newsprint, we can simply click to pick the stories that interest us. Even clicking is starting to get old, since we can just tap a tablet or cell phone in virtual silence. The Web lets us sample nearly all books in print without even making a purchase and efficiently download the whole book in a flash. We have both a digital, virtual identity and a real one. This profile just scratches the surface of the way our lives have been radically transformed through digital innovation. Radically transformed. Creatively destroyed.


Source:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.






October 19, 2012

Openness to Creative Destruction Will Speed Health Care Progress



CreativeDestructionOfMedicineBK2012-10-11.jpg












Source of book image: http://si.wsj.net/public/resources/images/OB-RQ412_bkrvme_DV_20120202132402.jpg





Eric Topol has bucked the medical establishment before. In entries on August 20, 2006 and on December 26, 2006 on this blog, he was quoted as arguing that stents were being overused. Now he argues that the medical establishment is slowing progress that could reduce disability and extend life. He advocates the sequencing of each of our genomes and a medical revolution that will fine-tune treatment to our genomic differences.

Many agree with Topol's view of the future of medicine, but many medical schools are neglecting teaching future doctors about the therapeutic implications of individual genomics.

Topol calls for the creative destruction of medical education and other medical institutions.

The early part of the book is weak because it discusses subjects on which Topol is not an expert---such as the history and applications of information technology. In these sections, he too often tediously explains the obvious and widely known. Sometimes in this section of the book, he is just wrong, as when (p. 14) he claims that Werner Sombart originated "creative destruction."

After the early chapters the book comes into its own when Topol discusses medical advances and challenges. While his early prose may be aimed too low, his later prose may be aimed too high---but it is better to be talked up to than down to, and the best of the later chapters contain some fascinating descriptions of what is happening on the frontiers of medicine, and what could be happening if we change policies and institutions to make medicine more open to creative destruction.

In the following few weeks, I will be quoting several of the more important or thought-provoking passages.


Book discussed:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.






September 2, 2012

Information Technology Enables Massive Process Creative Destruction



(p. 2) . . . I want to argue that something deep is going on with information technology, something that goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn't seem particularly consequential -- it's almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.


. . .


(p. 5) Now this second, digital economy isn't producing anything tangible. It's not making my bed in a hotel, or bringing me orange juice in the morning. But it is running an awful lot of the economy. It's helping architects design buildings, it's tracking sales and inventory, getting goods from here to there, executing trades and banking operations, controlling manufacturing equipment, making design calculations, billing clients, navigating aircraft, helping diagnose patients, and guiding laparoscopic surgeries. Such operations grow slowly and take time to form.


. . .


(p. 6) Is this the biggest change since the Industrial Revolution? Well, without sticking my neck out too much, I believe so. In fact, I think it may well be the biggest change ever in the economy. It is a deep qualitative change that is bringing intelligent, automatic response to the economy. There's no upper limit to this, no place where it has to end.


. . .


I think that for the rest of this century, barring wars and pestilence, a lot of the story will be the building out of this second economy, an unseen underground economy that basically is giving us intelligent reactions to what we do above the ground.



Source:

Arthur, W. Brian. "The Second Economy." McKinsey Quarterly, no. 4 (Oct. 2011): 90-99.

(Note: ellipses added.)

(Note: I first saw the passages quoted above on pages 243-244 of Timothy Taylor's "Recommendations for Further Reading" feature in The Journal of Economic Perspectives 26, no. 1 (Winter 2012).)






September 1, 2012

Mitt Romney on Innovation and Creative Destruction



No-ApologyBK2012-08-31.jpg













Source of book image: http://mittromneycentral.com/uploads/No-Apology1.jpg






(p. 108) Innovation and Creative Destruction

The key to increasing national prosperity is to promote good ideas and create the conditions that can lead them to be fully exploited--in existing businesses as well as new ones. Government is generally not the source of new ideas, although innovations from NASA and the military have provided frequent exceptions. Nor is government where innovation is commercially developed. But government policies do, in fact, have a major impact on the implementation of innovative ideas. The degree to which a nation makes itself productive, and thus how prosperous its citizens become, is determined in large measure by whether government adopts policies that stimulate innovation or that stifle it.

The government policy that has the greatest effect on innovation is simply whether or not the government will allow it. It's sad but true: Government can and often does purposefully prevent innovation and the resulting improvement in productivity. Recall my hypothetical example of a society in which half the farming jobs were lost due to innovation in the use of a plow? Some nations accept and encourage such "creative destruction," recognizing that in the long run it leads to greater productivity and wealth for its citizens. But other nations succumb to the objections of those in danger of becoming unemployed and prevent innovation that may reduce short-term employment.

Two centuries ago, more than three-quarters of our workforce actually did labor on farms. Over the succeeding decades, innovations like irrigation, fertilizer, and tractors were welcomed, and eventually large farming corporations were allowed to prosper, despite protests from family farmers and the often heart-wrenching dislocations that accompanied consolidation of farmlands. The result was the disappearance of millions of agricultural jobs and the large-scale migration of Americans from rural regions to our cities. Once there, they provided the labor that powered America's new industrial age. And at the same time, because farming innovation and productivity were allowed to flourish, America became the leader in agriculture education, research, and industry. Innovations from these sources have enabled us to produce sufficient food to feed not only our growing population but other parts of the world as well.



Source:

Romney, Mitt. No Apology: The Case for American Greatness. New York: St. Martin's Press, 2010.

(Note: bold in original.)






August 22, 2012

"It's All about Creative Destruction"



EllisonLarry2012-08-20.jpg













"LARRY ELLISON: 'It's all about creative destruction.'" Source of book image: online version of the WSJ review quoted and cited below.




(p. R6) In Silicon Valley, a spot known for constant change, Larry Ellison has kept his job atop Oracle Corp. . . . for decades. And that gives him a unique perspective on the industry and where it's headed.

The Wall Street Journal's Kara Swisher spoke with Mr. Ellison about the state of tech innovation, the future of the Internet--and what keeps him inspired.

What follows are edited excerpts of their discussion.


. . .


MS. SWISHER: A lot of people talk about the end of Silicon Valley, the end of innovation. Do you imagine that?

MR. ELLISON: It's all about creative destruction. Remember Woody Allen's great line about relationships: "Relationships are like a shark. It either has to move forward, or it dies."

That's true of a company. If you don't keep your technology current, if you're not monitoring what is possible today that wasn't possible yesterday, then someone's going to beat you to the punch. Someone's going to get ahead of you, and you're going to lose your customers to some competitor.

We see a lot of companies in Silicon Valley that are under stress now. But there are a lot of other companies that have come along and are doing interesting things.


. . .


MS. SWISHER: What keeps you going?

MR. ELLISON: Red Bull.

I mean, this is going to sound really corny, but life's a journey of discovery. I'm really fascinated by people, and by what can be done with technology. I also enjoy the competition, the process of learning as we compete, learning as we exploit these technologies to solve customer problems.

The whole thing is just fascinating. I don't know what I would do if I retired.




For the full interview, see:

Kara Swisher, interviewer. "Silicon Valley, the Long View; Larry Ellison on how much simpler the consumer has it now." The Wall Street Journal (Mon., June 4, 2012): R6.

(Note: ellipses added; bold and italics in original.)






July 25, 2012

Joe Biden's Dad Told Him to "Get Up" in Face of Job Loss







Innovative entrepreneurs, through the process of creative destruction, provide us with wonderful new products and services. But sometimes the process also results in job loss. One response to the job loss is to shut down innovation. Another is to preach resilience. Joe Biden's Dad said "get up." (The clip is from a talk that Joe Biden gave to the National Press Club on August 1, 2007. The full talk is posted to the C-SPAN web site.)


A mainly similar presentation of the "get up" message is on p. xxii of Biden's autobiography:

Biden, Joe. Promises to Keep: On Life and Politics. New York: Random House, 2007.






June 18, 2012

Ben Franklin Stores as Incubators of Retail Success



(p. 192) The chain was called Michaels. I'd never heard of it but, as George related its ancestry, I became more and more intrigued. You see, once upon a time it had been a Ben Franklin store, and therein lies a story.

Back in 1877, Edward and George Butler, brothers from Boston, came up with a new concept for retailing. Instead of setting up a specialty shop to sell one line of items--like shoes or dresses or kitchen supplies--they set up a store where they could sell all sorts of stuff. This was the very beginning of department stores, except that they weren't yet called that. They were called variety stores, and they carried a large assortment of low-cost goods. Then the Butlers set up a "five-cent counter," where everything cost a nickel. It worked in Boston, so they expanded westward and called it Ben Franklin Stores.

Three-quarters of a century later, in the days when America was just starting to move westward with the automobile, there were no shopping malls or big national retail chains. What you found in every town, especially in small-town America, was a variety store, like Ben Franklin's. In Lake Providence, we had Morgan and Lindsey's, where you could buy everything from paper napkins to thimbles, birthday cards, curtain hooks, and boxes of chocolates. The Butlers' idea of a nickel counter became so popular and widespread that these places came to be nicknamed "five-and-dimes" or "five-and ten-cent" stores.

(p. 193) While some of them became the heart of Main Street America, others grew to become legendary department stores, like Macy's in New York, Wanamaker's in Philadelphia, and Lehman's in Chicago. Still others merged into chains to compete with Ben Franklin Stores. That's how JC Penney's was born.



Source:

Wyly, Sam. 1,000 Dollars and an Idea: Entrepreneur to Billionaire. New York: Newmarket Press, 2008.





May 30, 2012

"Innovation" Should Be Reserved for Electricity, Printing Press, Telephone and iPhone



LightBulbInnovationGraphic2012-05-29.jpg Source of graphic: online version of the WSJ article quoted and cited below.



(p. B1) "Most companies say they're innovative in the hope they can somehow con investors into thinking there is growth when there isn't," says Clayton Christensen, a professor at Harvard Business School and the author of the 1997 book, "The Innovator's Dilemma."


. . .


Scott Berkun, the author of the 2007 book "The Myths of Innovation," which warns about the dilution of the word, says that what most people call an innovation is usually just a "very good product."

He prefers to reserve the word for civilization-changing inventions like electricity, the printing press and the telephone--and, more recently, perhaps the iPhone.


. . .


Mr. Berkun tracks innovation's popularity as a buzzword back to the 1990s, amid the dot-com bubble and the release of James M. Utterback's "Mastering the Dynamics of Innovation" and Mr. Christensen's "Dilemma."


. . .


(p. B8) Mr. Christensen classifies innovations into three types: efficiency innovations, which produce the same product more cheaply, such as automating credit checks; sustaining innovations, which turn good products into better ones, such as the hybrid car; and disruptive innovations, which transform expensive, complex products into affordable, simple ones, such as the shift from mainframe to personal computers.

A company's biggest potential for growth lies in disruptive innovation, he says, noting that the other types could just as well be called ordinary progress and normally don't create more jobs or business.

But the disruptive innovations can take five to eight years to bear fruit, he says, so companies lose patience.

It is far easier, he adds, for companies to just say they're innovating. "Everybody's innovating, because any change is innovation."



For the full story, see:

LESLIE KWOH. "You Call That Innovation? Companies Love to Say They Innovate, but the Term Has Begun to Lose Meaning." The Wall Street Journal (Weds., May 23, 2012): B1 & B8.

(Note: ellipses added.)






May 27, 2012

Private Equity Firms Increase Efficiency and Create as Many Jobs as They Destroy



(p. A23) Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.

The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.


. . .


As Reihan Salam noted in a fair-minded review of the literature in National Review, in any industry there is an astonishing difference in the productivity levels of leading companies and the lagging companies. Private equity firms like Bain acquire bad companies and often replace management, compel executives to own more stock in their own company and reform company operations.

Most of the time they succeed. Research from around the world clearly confirms that companies that have been acquired by private equity firms are more productive than comparable firms.

This process involves a great deal of churn and creative destruction. It does not, on net, lead to fewer jobs. A giant study by economists from the University of Chicago, Harvard, the University of Maryland and the Census Bureau found that when private equity firms acquire a company, jobs are lost in old operations. Jobs are created in new, promising operations. The overall effect on employment is modest.



For the full commentary, see:

DAVID BROOKS. "How Change Happens." The New York Times (Tues., May 22, 2012): A23.

(Note: ellipsis added.)

(Note: the online version of the commentary is dated May 21, 2012.)



The "giant study by economists" mentioned by Brooks is:

Davis, Steven J., John C. Haltiwanger, Ron S. Jarmin, Josh Lerner, and Javier Miranda. "Private Equity and Employment." National Bureau of Economic Research, Inc, NBER Working Papers: # 17399, Sept. 2011.






May 11, 2012

Harvard and M.I.T. Free Online Courses May Disrupt Mid-Tier Universities



(p. A17) In what is shaping up as an academic Battle of the Titans -- one that offers vast new learning opportunities for students around the world -- Harvard and the Massachusetts Institute of Technology on Wednesday announced a new nonprofit partnership, known as edX, to offer free online courses from both universities.

Harvard's involvement follows M.I.T.'s announcement in December that it was starting an open online learning project, MITx. Its first course, Circuits and Electronics, began in March, enrolling about 120,000 students, some 10,000 of whom made it through the recent midterm exam. Those who complete the course will get a certificate of mastery and a grade, but no official credit. Similarly, edX courses will offer a certificate but not credit.

But Harvard and M.I.T. have a rival -- they are not the only elite universities planning to offer free massively open online courses, or MOOCs, as they are known. This month, Stanford, Princeton, the University of Pennsylvania and the University of Michigan announced their partnership with a new commercial company, Coursera, with $16 million in venture capital.


. . .


Education experts say that while the new online classes offer opportunities for students and researchers, they pose some threat to low-ranked colleges.

"Projects like this can impact lives around the world, for the next billion students from China and India," said George Siemens, a MOOC pioneer who teaches at Athabasca University, a publicly supported online Canadian university. "But if I were president of a mid-tier university, I would be looking over my shoulder very nervously right now, because if a leading university offers a free circuits course, it becomes a real question whether other universities need to develop a circuits course."



For the full story, see:

TAMAR LEWIN. "Harvard and M.I.T. Join to Offer Web Courses." The New York Times (Thurs., May 3, 2012): A17.

(Note: ellipsis added.)

(Note: the online version of the story is dated May 2, 2012, and has the title "Harvard and M.I.T. Team Up to Offer Free Online Courses.")






May 9, 2012

Capitalism More about Creating New Markets than about Competing to Dominate Old Ones



(p. A21) As a young man, Peter Thiel competed to get into Stanford. Then he competed to get into Stanford Law School. Then he competed to become a clerk for a federal judge. Thiel won all those competitions. But then he competed to get a Supreme Court clerkship.

Thiel lost that one. So instead of being a clerk, he went out and founded PayPal. Then he became an early investor in Facebook and many other celebrated technology firms. Somebody later asked him. "So, aren't you glad you didn't get that Supreme Court clerkship?"

The question got Thiel thinking. His thoughts are now incorporated into a course he is teaching in the Stanford Computer Science Department. (A student named Blake Masters posted outstanding notes online, and Thiel has confirmed their accuracy.)

One of his core points is that we tend to confuse capitalism with competition. We tend to think that whoever competes best comes out ahead. In the race to be more competitive, we sometimes confuse what is hard with what is valuable. The intensity of competition becomes a proxy for value.

In fact, Thiel argues, we often shouldn't seek to be really good competitors. We should seek to be really good monopolists. Instead of being slightly better than everybody else in a crowded and established field, it's often more valuable to create a new market and totally dominate it. The profit margins are much bigger, and the value to society is often bigger, too.

Now to be clear: When Thiel is talking about a "monopoly," he isn't talking about the illegal eliminate-your-rivals kind. He's talking about doing something so creative that you establish a distinct market, niche and identity. You've established a creative monopoly and everybody has to come to you if they want that service, at least for a time.



For the full commentary, see:

DAVID BROOKS. "The Creative Monopoly." The Wall Street Journal (Tues., April 24, 2012): A21.

(Note: the online version of the article is dated April 23, 2012.)


The online Peter Thiel notes are at:

http://blakemasters.tumblr.com/post/21169325300/peter-thiels-cs183-startup-class-4-notes-essay





May 3, 2012

Steve Jobs Channels Ellis Wyatt



(p. 260) In 2007 Forbes magazine named Steve Jobs the highest-paid exec-(p. 261)utive of any of America's five hundred largest companies, based on gains in the value of stock granted to him at Apple. He was on the board of directors of the Walt Disney Co. Yet his former residence in Woodside, where he had once met with Catmull and Smith and mused about buying Lucasfilm's Computer Division, was now in a state of decay under his ownership.

He had wanted to demolish it; after a group of neighborhood residents opposed his plan to do so, he left the house open to the elements. The interior suffered damage from water and mold. Vines crept up the stucco walls and wandered inside.

The memories that haunted its hallways were those of Jobs's darkest times. He had bought the house only months before the humiliation of his firing from Apple; he lived in it through that firing and through the hard, money-hemorrhaging years of Pixar and NeXT. He left it as his fortunes were about to change, as he was sending Microsoft away from Pixar, convinced that he had something he should hold on to.

When a judge ruled against his quest for a demolition permit, Jobs appealed in 2006 and 2007 all the way to the California Supreme Court, but he lost at every stage. He received proposals from property owners offering to cart the house away in sections and restore it elsewhere; he rejected them. One way or another, it seemed, he meant for the house to be destroyed.



Source:

Price, David A. The Pixar Touch: The Making of a Company. New York: Alfred A. Knopf, 2008.

(Note: italics in original.)

(Note: The passage above is from the Epilogue and the pages given above are from the hardback edition (pp. 260-261). The identical passage also appears in the 2009 paperback edition, but on p. 265.





March 27, 2012

Diamond to Teach Creative Destruction Colloquium in Fall 2012





CreativeDestructionColloquiumPoster2012PortraitTopHalfCropped.jpg

Colloquium Rationale:

Creative destruction is the process through which innovative new products are created, and older obsolete products are destroyed. In transportation, for example, cars creatively destroyed the horse and buggy, trains creatively destroyed horse-drawn wagons. Such innovations contribute to longer and richer lives, but may come at the cost of greater uncertainty in the labor market. Schumpeter claimed that the process of creative destruction is the essential fact about capitalism. Although Nobel-prize-winner George Stigler has described creative destruction as "heresy," a growing number of economists and non-economists have found the concept useful in understanding the world. While most of the emphasis will be on the implications of creative destruction for business and the economy, the discussion will sometimes involve issues related to information science, sociology, medicine, law, engineering, psychology, literature, political science, architecture, and history.





You can hear me talking about last year's version of the Creative Destruction Colloquium (which was offered last year under a different course number and a slightly different title) in the following YouTube video:











March 10, 2012

"Crises Are an Inevitable Concomitant of Risk"



(p. 11) Some economic risks are worth taking, and crises are an inevitable concomitant of risk. Crises, like firm failures, can be seen as a manifestation of the Schumpeterian process of creative destruction. The role for economic analysis is to ensure that the creation dominates and that the destruction is not too costly.


Source:

Eichengreen, Barry. Capital Flows and Crises. Cambridge, MA: The MIT Press, 2003.






February 29, 2012

Successful Innovation Depends More on Will than on Intellect



(p. 9) The odysseys of [Lasseter, Catmull, Smith and Jobs], and of Pixar as a whole, bring to mind the observation of the maverick economist Joseph Schumpeter that successful innovation "is a feat not of intellect, but of will." Writing about the psychology of entrepreneurs in the early twentieth century, a rime when the subject was unfashionable, he believed few individuals are prepared for "the resistances and uncertainties incident to doing what has not been done before." Those who braved the risks of failure did so out of noneconomic as well as economic motives, among them "the joy of creating, of getting things done, or simply of exercising one's energy and ingenuity." In Pixar's case, at least, the resistances and uncertainties were abundant--as was the will.


Source:

Price, David A. The Pixar Touch: The Making of a Company. New York: Alfred A. Knopf, 2008.

(Note: my strong impression is that the pagination is the same for the 2008 hardback and the 2009 paperback editions, except for part of the epilogue, which is revised and expanded in the paperback. I believe the passage above has the same page number in both editions.)





February 20, 2012

Nasar Gives Compelling Portrait of Joseph Schumpeter and His Vienna



Grand-PursuitBK2012-02-05.jpg














Source of book image: http://luxuryreading.com/wp-content/uploads/2011/10/grand-pursuit.jpg





(p. C31) Ms. Nasar gives us Belle Époque Vienna -- infatuated with modernity and challenging London in the race to electrify with new telephone service, state-of-the-art factories and power-driven trams -- and then a devastating picture of Vienna at the end of World War I: war veterans loitering outside restaurants waiting for scraps, and desperate members of a middle class that saw inflation wipe out all its savings trading a piano for a sack of flour, a gold watch chain for a few sacks of potatoes.


. . .


Among the more compelling portraits in this volume is that of Joseph Alois Schumpeter, the brilliant European economist who argued that the distinctive feature of capitalism was "incessant innovation" -- a "perennial gale of creative destruction" -- and who identified the entrepreneur as the visionary who could "revolutionize the pattern of production by exploiting an invention" or "an untried technological possibility."



For the full review, see:

MICHIKO KAKUTANI. "BOOKS OF THE TIMES; The Economist's Progress: Better Living Through Fiscal Chemistry." The New York Times (Fri., December 2, 2011): C31.

(Note: ellipsis added.)

(Note: the online version of the article is dated December 1, 2011.)







February 12, 2012

Pixar as a Case Study on Innovative Entrepreneurship



Pixar-TouchBK2012-02-05.jpg














Source of book image: http://murraylibrary.org/2011/09/the-pixar-touch-the-making-of-a-company/





Toy Story and Finding Nemo are among my all-time-favorite animated movies. How Pixar developed the technology and the story-telling sense, to make these movies is an enjoyable and edifying read.

Along the way, I learned something about entrepreneurship, creative destruction, and the economics of technology. In the next couple of months I occasionally will quote passages that are memorable examples of broader points or that raise thought-provoking questions about how innovation happens.


Book discussed:

Price, David A. The Pixar Touch: The Making of a Company. New York: Alfred A. Knopf, 2008.






February 10, 2012

Creative Destruction Helps Us Be Well



CreativeDestructionOfMedicine2012-02-04.jpg










Source of book image: online version of the WSJ review quoted and cited below.








Dr. Eric Topol's credible and thought-provoking comments on the over-use of stents appeared in entries in this blog in August 2006 and in December 2006.



(p. A15) "The U.S. government has been preoccupied with health care 'reform,' but this refers to improving access and insurance coverage and has little or nothing to do with innovation," even though, as Dr. Topol notes, adopting new approaches would improve care and lower costs. . . .


. . .


"The Creative Destruction of Medicine"--an allusion to economist Joseph Schumpeter's description of "creative destruction" as an engine of business innovation--is a venture capitalist's delight, describing dozens of medical technologies that show great promise. The book also provides colorful anecdotes about Dr. Topol's own sampling of these products, as both a doctor and stand-in patient.


. . .


. . . , full adoption of the new tools will require the Food and Drug Administration to alter the way it evaluates products. The FDA, he says, should allow the testing of drugs on patients who are selected for their prospect of deriving a benefit. Right now, the FDA usually requires drugs to be tested in a scattershot fashion on large populations. With drugs being tested on cancer patients, he notes, the "FDA insists on a body count to be able to quantify how much and how long the new drug improves survival"--even though diagnostic markers can sometimes reveal in advance which patients are unlikely to gain a benefit.

Dr. Topol worries that doctors will resist technologies that empower patients because the tools will also diminish the doctors' gatekeeper role. The American Medical Association, for example, battled firms that provide genetic information directly to patients. "This arrangement ultimately appears untenable," the author writes, "and eventually there will need to be full democratization of DNA for medicine to be transformed."



For the full review, see:

SCOTT GOTTLIEB. "BOOKSHELF; Digital Doctoring; It's hard to fake sleep to avoid your spouse's bedtime chatter when a 'Zeo clock' is displaying your real-time brain waves." The Wall Street Journal (Fri., February 3, 2012): A15.

(Note: ellipses added.)

(Note: the online version of the review has the title "BOOKSHELF; Digital Doctoring; The digital revolution can spur unprecedented advances in the medical sciences, argues Eric Topol in "The Creative Destruction of Medicine".")



The book under review is:

Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.






February 3, 2012

How to Slow Down Creative Destruction



(p. 356) This catallaxy will not go smoothly, or without resistance. Natural and unnatural disasters will still happen. Governments will bail out big corporations and big bureaucracies, hand them special favours such as subsidies or carbon rations and regulate them in such a way as to create barriers to entry, slowing down creative destruction. Chiefs, priests, thieves, financiers, consultants and others will appear on all sides, feeding off the surplus (p. 357) generated by exchange and specialisation, diverting the life-blood of the catallaxy into their own reactionary lives. It happened in the past. Empires bought stability at the price of creating a parasitic court; monotheistic religions bought social cohesion at the price of a parasitic priestly class; nationalism bought power at the expense of a parasitic military; socialism bought equality at the price of a parasitic bureaucracy; capitalism bought efficiency at the price of parasitic financiers.


Source:

Ridley, Matt. The Rational Optimist: How Prosperity Evolves. New York: Harper, 2010.





January 31, 2012

Is "The Replicator" the Personal Fabricator of Gershenfeld's Dreams?



Replicator3Dprinter2012-01-28.jpgThe Replicator 3-D printer. Source of photo: online version of the NYT article quoted and cited below.



Back in 2005 technology "visionary" Neil Gershenfeld predicted the soon to be seen day when personal fabricators would follow the path of computers which progressed from mainframes costing millions to mini-computers costing hundreds of thousands to personal computers costing a couple of thousand. Well apparently that day is here.

Now we will see if the implications are as far-reaching as Gershenfeld predicted.



(p. B7) By now you may have heard about the Replicator, a $1,750 3-D printer made by the Brooklyn start-up MakerBot, due next month. If not, the significance of the Replicator is that it is the first 3-D printer to break the $2,000 barrier. Here's more about what the Replicator can and can't do.

Q. What does a 3-D printer use?
A: Spools of coiled A.B.S. (acrylonitrile butadiene styrene) plastic that costs about $45 each per kilogram. This is the same materials that is used to make Lego blocks. It is strong, safe and comes in many colors. One spool can make about 176 chess pieces.



For the full story, see:

WARREN BUCKLEITNER. "Gadgetwise; A 3-D Printer for Under $2,000: What Can It Do?" The New York Times (Thurs., January 26, 2012): B7.

(Note: bold in original.)

(Note: the online version of the article was dated January 23, 2012, and had the title "3-D Printing for the Masses: MakerBot's Replicator." The online version differs in several places from the print version. Where they differ, I quote the print version.)



The Gershenfeld book discussed above is:

Gershenfeld, Neil. Fab: The Coming Revolution on Your Desktop--from Personal Computers to Personal Fabrication. New York: Basic Books, 2005.






January 30, 2012

Creative Destruction Creates as Many New Jobs as It Destroys



(p. 113) It was Joseph Schumpeter who pointed out that the competition which keeps a businessman awake at night is not that from his rivals cutting prices, but that of entrepreneurs making (p. 114) his product obsolete. As Kodak and Fuji slugged it out for dominance in the 35mm film industry in the 1990s, digital photography began to extinguish the entire market for analogue film - as analogue records and analogue video cassettes had gone before. Creative destruction, Schumpeter called it. His point was that there is just as much creation going on as destruction - that the growth of digital photography would create as many jobs in the long run as were lost in analogue, or that the savings pocketed by a Wal-Mart customer are soon spent on other things, leading to the opening of new stores to service those new demands. In America, roughly 15 per cent of jobs are destroyed every year; and roughly 15 per cent created.


Source:

Ridley, Matt. The Rational Optimist: How Prosperity Evolves. New York: Harper, 2010.





December 27, 2011

Companies Can Grow to Greatness in Brutally Turbulent Environments



(p. 118) All that said, there remains a question: what about "the perennial gale of creative destruction" as described by the famous twentieth-century economist Joseph Schumpeter, wherein technological change and visionary entrepreneurs upend and destroy the old order and create a new order, only to see their new order destroyed and replaced by an even newer order, in an endless cycle of chaos and upheaval? Perhaps all social institutions in our modern world face disruptive forces so fast, big, and unpredictable that every entity will fall within years or decades, without exception. Can we still stave off decline in the face of severe turbulence?

While working on How the Mighty Fall, my colleague Morten Hansen and I have been simultaneously working on a six-year research project to study companies that grew from vulnerability to greatness in severe environments characterized by rapid and unpredictable change in contrast to others that did not prevail in the same brutally turbulent environments.



Source:

Collins, Jim. How the Mighty Fall: And Why Some Companies Never Give In. New York: HarperCollins Publishers, Inc., 2009.

(Note: italics in original.)






December 20, 2011

A&P Sold Consumers Better and Lower-Priced Food



GreatA&Pbk.jpg














Source of book image: online version of the WSJ review quoted and cited below.








(p. A15) Mr. Levinson's history centers on the two Hartford sons who followed their father into the business. They would spend their entire working lives at the company being known simply as "Mr. George" and "Mr. John." Thoughtful and studious, Mr. George's idea of excitement was a good jigsaw puzzle; Mr. John, somewhat more outgoing, liked the horses but also a daily lunch of milk and crackers. Together the brothers, neither of whom had finished high school, built what would be, for 40 years, the largest retail outlet in the world.

The brothers' business philosophy was simple, writes Mr. Levinson: "If the company keeps its costs down and prices low, more shoppers would come through its doors, producing more profits than if it kept prices high." The more stores they could open, the greater the take.

But the Hartfords had a public-relations problem. Since the nation's earliest days, small family stores had served as community anchors. There were thousands across the country. Mom and pop knew every customer who came through their door; they extended credit to families down on their luck. If low-priced chains drove out such stores, what would happen to small-town America?

In fact, many mom-and-pop operations were inefficiently and incompetently run. A&P might be coldly corporate by comparison, but it offered consumers far more variety and fresher, better-quality goods at less cost to the family budget.



For the full review, see:

PATRICK COOKE. "BOOKSHELF; How a Grocer Bagged Profits; At its peak, the chain had nearly 16,000 stores. Critics charged it with competing unfairly by offering too-low prices." The Wall Street Journal (Mon., AUGUST 29, 2011): A15.

(Note: ellipsis added.)



The book under review is:

Levinson, Marc. The Great A&P and the Struggle for Small Business in America. New York: Hill and Wang, 2011.





October 8, 2011

Entrepreneur Jobs Was an Exemplar of Creative Destruction






The clip embedded above from the CNBC web site, was broadcast on CNBC on Weds., Oct. 5, 2011.


I watched several commentaries on Steve Jobs after his death was announced today (Weds., Oct. 5). I think the one above, from CNBC, was one of the best.

It highlights many important aspects of Jobs' life. That he came back from failure, that he brought us products we didn't know we needed until he showed us what they could do, that his products disrupted the status quo of whole industries, that at his death he owned more shares of Disney than anyone else. (Steve Jobs and Walt Disney were two of the greatest "project entrepreneurs" of all time.)






September 29, 2011

McKinsey Finds 30% of Employers Will Drop Health Coverage in Response to Obamacare



McKinsey is probably the best known business consulting and forecasting firm in the United States. Many well-known management gurus, and corporate executives, have spent time working for McKinsey (as did Chelsea Clinton). One of their senior partners (Foster) co-authored a useful book called Creative Destruction.


(p. A2) A report by McKinsey & Co. has found that 30% of employers are likely to stop offering workers health insurance after the bulk of the Obama administration's health overhaul takes effect in 2014.


. . .


Previous research has suggested the number of employers who opt to drop coverage altogether in 2014 would be minimal.

But the McKinsey study predicts a more dramatic shift from employer-sponsored health plans once the new marketplace takes effect. Starting in 2014, all but the smallest employers will be required to provide insurance or pay a fine, while most Americans will have to carry coverage or pay a different fine. Lower earners will get subsidies to help them pay for plans.

In surveying 1,300 employers earlier this year, McKinsey found that 30% said they would "definitely or probably" stop offering employer coverage in the years after 2014. That figure increased to more than 50% among employers with a high awareness of the overhaul law.



For the full story, see:

JANET ADAMY. "Study Sees Cuts to Health Plans." The Wall Street Journal (Weds., JUNE 8, 2011): A15.

(Note: ellipsis added.)


The Foster book is:

Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market---and How to Successfully Transform Them. New York: Currency Books, 2001.






September 16, 2011

Art Diamond Describes Honors Colloquium on Creative Destruction







The clip above is embedded from You Tube. It was recorded on July 6, 2011 in Mammel Hall, the location of the College of Business at the University of Nebraska at Omaha (UNO). I am grateful to Charley Reed of UNO University Relations for doing a great job of shooting and editing the clip.





August 29, 2011

In 1880s Prices Fell Because of Technological Progress



RecentEconomicChangesBK.jpg
















Source of book image: http://covers.openlibrary.org/b/id/5764338-L.jpg







Michael Perelman has strongly suggested that I read David Well's book. It is on my "to do" list.



(p. C10) The dull title of "Recent Economic Changes" does no justice to David A. Wells's fascinating contemporary account of a deflationary miasma that settled over the world's advanced economies in the 1880s. His cheery conclusion: Prices were falling because technology was progressing. What had pushed the price of a bushel of wheat down to 67 cents in 1887 from $1.10 in 1882 was nothing more sinister than the opening up of new regions to cultivation (Australia, the Dakotas) and astounding improvements in agricultural machinery.


For the full review, see:

JAMES GRANT. "FIVE BEST; Little-Known Gold From the Gilded Age." The Wall Street Journal (Sat., AUGUST 6, 2011): C10.


Source of book under review:

Wells, David A. Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society. New York: D. Appleton and Co., 1889.


Michael Perelman argues that in Recent Economic Changes, David Wells anticipates the substance, although not the wording, of Schumpeter's "creative destruction":

Perelman, Michael. "Schumpeter, David Wells, and Creative Destruction." The Journal of Economic Perspectives 9, no. 3 (Summer 1995): 189-97.





July 30, 2011

Capitalism Was Not Inevitable



RelentlessRevolutionBK.jpg













Source of book image:
http://ecx.images-amazon.com/images/I/519PfT2oUtL.jpg




(p. 15) What is the nature of capitalism? For Joseph Schumpeter, the Austrian-born economist whose writings have acquired a special relevance in the past year or two, this most modern of economic systems "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Capitalism, Schumpeter proclaimed, cannot stand still; it is a system driven by waves of entrepreneurial innovation, or what he memorably described as a "perennial gale of creative destruction."

Schumpeter died in 1950, but his ghost looms large over Joyce Appleby's splendid new account of the "relentless revolution" unleashed by capitalism from the 16th century onward. Appleby, a distinguished historian who has dedicated her career to studying the origins of capitalism in the Anglo-American world, here broadens her scope to take in the global history of capitalism in all its creative -- and destructive -- glory.

She begins "The Relentless Revolution" by noting that the rise of the economic system we call capitalism was in many ways improbable. It was, she rightly observes, "a startling departure from the norms that had prevailed for 4,000 years," signaling the arrival of a new mentality, one that permitted private investors to pursue profits at the expense of older values and customs.

In viewing capitalism as an extension of a culture unique to a particular time and place, Appleby is understandably contemptuous of those who posit, in the spirit of Adam Smith, that capitalism was a natural outgrowth of human nature. She is equally scornful of those who believe that its emergence was in any way inevitable or inexorable.


. . .


. . . , she captures how a new generation of now forgotten economic writers active long before Adam Smith built a case "that the elements in any economy were negotiable and fluid, the exact opposite of the stasis so long desired." This was a revolution of the mind, not machines, and it ushered in profound changes in how people viewed everything from usury to joint stock companies. As she bluntly concludes, "there can be no capitalism . . . without a culture of capitalism."


. . .


The individual entrepreneur is at the center of her analysis, and her book offers thumbnail sketches of British innovators from James Watt to Josiah Wedgwood. She continues on to the United States and Germany, giving readers a whirlwind tour of the lives and achievements of a host of men whom she calls "industrial leviathans" -- Vanderbilt, Rockefeller and Carnegie in the United States; Thyssen, Siemens and Zeiss in Germany. All created new industries while destroying old ones.



For the full review, see:

STEPHEN MIHM. "Capitalist Chameleon." The New York Times Book Review (Sun., January 24, 2010): 15.

(Note: ellipses added except for the one in the "there can be no capitalism . . . without a culture of capitalism" quote.)

(Note: the online version of the review is dated January 22, 2010.)


Book under review:

Appleby, Joyce. The Relentless Revolution: A History of Capitalism. New York: W. W. Norton & Company, 2010.





July 17, 2011

Medieval Halls of the Rich Incubated Plague in a Nest of "Filth Unmentionable"




(p. 51) In even the best houses, floors were generally just bare earth strewn with rushes, harboring "spittle and vomit and urine of dogs and men, beer that hath been cast forth and remnants of fishes and other filth unmentionable," as the Dutch theologian and traveler Desiderius Erasmus rather crisply summarized in 1524. New layers of rushes were laid down twice a year normally, but the old accretions were seldom removed, so that, Erasmus added glumly, "the substratum may be unmolested for twenty years." The floors were in effect a very large nest, much appreciated by insects and furtive rodents, and a perfect incubator for plague. Yet a deep pile of flooring was generally a sign of prestige. It was common among the French to say of a rich man that he was "waist deep in straw."


Source:

Bryson, Bill. At Home: A Short History of Private Life. New York: Doubleday, 2010.





June 26, 2011

Diamond to Teach Honors Colloquium on Creative Destruction in Fall 2011



HONR300CreativeDestructionPoster2011-06-22.jpg


As of 6/22/11, space is still available in the honors colloquium.






May 26, 2011

Government Finally Allows Steve Jobs to Creatively Destroy His Own House



(p. A18) WOODSIDE, Calif. -- There may not be an app for it, but Steve Jobs did have a permit. And with that, his epic battle to tear down his own house is finally over.

For the better part of the last decade, Mr. Jobs, the co-founder and chief executive of Apple, has been trying to demolish a sprawling, Spanish-style mansion he owns here in Woodside, a tony and techie enclave some 30 miles south of San Francisco, in hopes of building a new, smaller home on the lot. His efforts, however, had been delayed by legal challenges and cries for preservation of the so-called Jackling House, which was built in the 1920s for another successful industrialist: Daniel Jackling, whose money was in copper, not silicon.


. . .


"Steve Jobs knew about the historic significance of the house," Mr. Turner said. "And unfortunately he disregarded it."

Mr. Turner said the mansion, which had 35 rooms in nearly 15,000 square feet of interior space, was significant in part because it was built by George Washington Smith, an architect who is known for his work in California. But Mr. Jobs had been dismissive of Mr. Smith's talents, calling the house "one of the biggest abominations" he had ever seen.



For the full story, see:

JESSE McKINLEY. "With Demolition, Apple Chief Makes Way for House 2.0." The New York Times (Fri., February 16, 2011): A18.

(Note: ellipsis added.)

(Note: the online version of the article is dated February 15, 2011.)





May 19, 2011

Entrepreneur Ken Olsen Was First Lionized and Then Chastised



OlsenKenObit2011-05-16.jpg"Ken Olsen, the pioneering founder of DEC, in 1996." Source of caption and photo: online version of the NYT article quoted and cited below.


I believe in The Road Ahead, Bill Gates describes Ken Olsen as one of his boyhood heroes for having created a computer that could compete with the IBM mainframe. His hero failed to prosper when the next big thing came along, the PC. Gates was determined that he would avoid his hero's fate, and so he threw his efforts toward the internet when the internet became the next big thing.

Christensen sometimes uses the fall of minicomputers, like Olsen's Dec, to PCs as a prime example of disruptive innovation, e.g., in his lectures on disruptive innovation available online through Harvard. A nice intro lecture is viewable (but only using Internet Explorer) at: http://gsb.hbs.edu/fss/previews/christensen/start.html



(p. A22) Ken Olsen, who helped reshape the computer industry as a founder of the Digital Equipment Corporation, at one time the world's second-largest computer company, died on Sunday. He was 84.


. . .


Mr. Olsen, who was proclaimed "America's most successful entrepreneur" by Fortune magazine in 1986, built Digital on $70,000 in seed money, founding it with a partner in 1957 in the small Boston suburb of Maynard, Mass. With Mr. Olsen as its chief executive, it grew to employ more than 120,000 people at operations in more than 95 countries, surpassed in size only by I.B.M.

At its peak, in the late 1980s, Digital had $14 billion in sales and ranked among the most profitable companies in the nation.

But its fortunes soon declined after Digital began missing out on some critical market shifts, particularly toward the personal computer. Mr. Olsen was criticized as autocratic and resistant to new trends. "The personal computer will fall flat on its face in business," he said at one point. And in July 1992, the company's board forced him to resign.



For the full obituary, see:

GLENN RIFKIN. "Ken Olsen, Founder of the Digital Equipment Corporation, Dies at 84." The New York Times (Tues., February 8, 2011): A22.

(Note: ellipsis added.)

(Note: the online version of the story is dated February 7, 2011 and has the title "Ken Olsen, Who Built DEC Into a Power, Dies at 84.")


Gates writes in autobiographical mode in the first few chapters of:

Gates, Bill. The Road Ahead. New York: Viking Penguin, 1995.


Christensen's mature account of disruptive innovation is best elaborated in:

Christensen, Clayton M., and Michael E. Raynor. The Innovator's Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.





April 3, 2011

U.S. Holds "Edge in Its Openness to Innovation"



TycoonsBK2011-03-11.jpg














Source of book image: http://www.tower.com/tycoons-how-andrew-carnegie-john-d-rockefeller-jay-charles-r-morris-paperback/wapi/100346776?download=true&type=1



(p. 24) Judging by Charles R. Morris's new book, "The Tycoons," it takes about 100 years for maligned monopolists and "robber barons" to morph into admirable innovators.

Morris skillfully assembles a great deal of academic and anecdotal research to demonstrate that Andrew Carnegie, John D. Rockefeller, Jay Gould and J. P. Morgan did not amass their fortunes by trampling on the downtrodden or ripping off consumers - . . .


. . .


Though Morris only hints at it, the truth is that the real heroes of the American industrial revolution were not his four featured tycoons, but the American people themselves. I don't mean this to sound like a corny burst of patriotism. In the 19th century, the United States was still young. Most families had either been booted out of Europe or fled it, and they didn't care about tradition or the Old Guard. With little to lose, they were willing to bet on a roll of the dice, even if it was they who occasionally got rolled. Europe was encrusted with guilds, unions and unbendable rules. Britons took half a day to make a rifle stock, because 40 different tradesmen poked their noses into the huddle. American companies polished off new rifle stocks in 22 minutes.

The United States still holds an edge in its openness to innovation. In 1982, French farmers literally chased the French agriculture minister, Edith Cresson, off their fields with pitchforks because she suggested reform. By contrast, back in the late 1850's, Abraham Lincoln was a hot after-dinner speaker. Was he discussing slavery? No. The title of his talk was "Discoveries and Inventions." The real root of economic growth is not natural resources or weather or individual genius. It's attitude, not latitude. The Austrian economist Joseph Schumpeter called innovations gales of "creative destruction." Americans, not Europeans, had the gall to stare into those gales - with optimism.



For the full review, see:

TODD G. BUCHHOLZ . "'The Tycoons': Benefactors of Great Wealth." The New York Times Book Review (Sun., October 2, 2005): 24.

(Note: ellipses added.)

(Note: the online version of the review has the title "'The Tycoons': Benefactors of Great Wealth.")


Book under review:

Morris, Charles R. The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy. New York: Times Books, 2005.





March 5, 2011

Caballero Worries about the Relevance of Mainstream Macro Modeling



In the past, I have found some of MIT economist Ricardo Caballero's research useful because he takes Schumpeter's process of creative destruction seriously.

In a recent paper, he joins a growing number of mainstream economists who worry that the recent and continuing economic crisis has implications for the methodology of economics:


In this paper I argue that the current core of macroeconomics--by which I mainly mean the so-called dynamic stochastic general equilibrium approach--has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in "fine-tuning" mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in "broad-exploration" mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.


Source:

Caballero, Ricardo J. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome." NBER Working Paper # w16429, October 2010.


The paper has been published as:

Caballero, Ricardo J. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome." Journal of Economic Perspectives 24, no. 4 (Fall 2010): 85-102.





February 13, 2011

Internet Enabled Creative Destruction



(p. R4) To understand the challenges that faced businesses the past 10 years, consider the household names that didn't make it through the decade: Anheuser-Busch, Compaq, Gillette, Enron, Lehman Brothers, Merrill Lynch, WorldCom.


. . .


As the decade rolled on, the Internet came to be known for destroying businesses. It upended decades-old business models in fields such as media, advertising, travel and entertainment, as consumers and advertisers migrated to the digital world.

But that same shift created opportunity. No one epitomized that better than Google Inc. A mere 15 months old at the beginning of the decade, it morphed from a startup technology company into an advertising and media powerhouse and is now plotting a move into communications. There, it will clash with Apple Inc., which was reborn following the return of co-founder Steve Jobs in 1997. Apple's iPod and iTunes reshaped the music industry; its iPhone revolutionized communications by opening itself to independent innovators.

"This is what [Austrian economist Joseph] Schumpeter had in mind with his term 'creative destruction,'" says Paul David, an economic historian at Stanford University. Industrial collapse is a "messy, messy process," Mr. David says. "It's a great drama, and watching it play out in this decade has been very interesting."



For the full story, see:

SCOTT THURM. "Creativity, Meet Destruction; The Decade Rewrote the Corporate Handbook, Thanks to the Web, Globalization and the Collapse of Two Bubbles." The Wall Street Journal (Mon., DECEMBER 21, 2009): R4.

(Note: ellipsis added.)

(Note: the online version of the article is dated DECEMBER 22, 2009.)





January 18, 2011

Artisan's Skills Were Still Required for Kay's Flying Shuttle



(p. 223) Kay's flying shuttle made it possible for weavers to produce a wider product, which they called "broadloom," but doing so was demanding. Weaving requires that the weft threads be under constant tension in order to make certain that each one is precisely the same length as its predecessor; slack is the enemy of a properly woven cloth. Using a flying shuttle to carry weft threads through the warp made it possible to weave a far wider bolt of cloth, but the required momentum introduced the possibility of a rebound, and thereby a slack thread. Kay's invention still needed a skilled artisan to catch the shuttle and so avoid even the slightest bit of bounce when it was thrown across the loom.


Source:

Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.





December 20, 2010

Government "Gave People the Crazy Juice"



BoettkePete2010-12-19.jpg "Peter J. Boettke of George Mason University is the emerging standardbearer for a revived Austrian school of economics." Source of caption and photo: online version of the WSJ article quoted and cited below.


(p. B1) Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls "dress Crocs," hardly seems like the type to lead a revolution.

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people's ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.

To these free-market economists, government intrusion ultimately sows the seeds of the next crisis. It hampers what one famous Austrian, Joseph Schumpeter, called the process of "creative destruction."


. . .


(p. B3) It wasn't a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership "gave people the crazy juice," he says.




For the full story, see:

KELLY EVANS. "Spreading Hayek, Spurning Keynes; Professor Leads an Austrian Revival." The Wall Street Journal (Sat., AUGUST 28, 2010): B1 & B3.

(Note: ellipsis added.)





November 20, 2010

Capitalism's Market Entrepreneurs Benefit the Common Man



VanderbiltFiskCartoon2010-11-14.jpg"Rails to riches: An 1870 cartoon depicting James Fisk's attempt to stop Cornelius Vanderbilt from gaining control of the Erie Railroad Company." Source of caption and cartoon: online version of the WSJ article quoted and cited below.


I have read H.W. Brands' Masters of Enterprise book and found that it contained some interesting anecdotes, but not very insightful interpretation. From Amity Shlaes' uswdul review quoted below, I would expect the same from Brands' most recent book.


(p. C7) Mr. Brands laments that capitalism's triumph in the late 19th century created a disparity between the "wealthy class" and the common man that dwarfs any difference of income in our modern distribution tables. But this pitting of capitalism against democracy will not hold. When the word "class" crops up in economic discussions, watch out: it implies a perception of society held in thrall to a static economy of rigid social tiers. Capitalism might indeed preclude democracy if capitalism meant that rich people really were a permanent class, always able to keep the money they amass and collect an ever greater share. But Americans are an unruly bunch and do not stay in their classes. The lesson of the late 19th century is that genuine capitalism is a force of creative destruction, just as Joseph Schumpeter later recognized. Snapshots of rich versus poor cannot capture the more important dynamic, which occurs over time.

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations--and in thoroughly democratic fashion--this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out. If Mr. Brands were right, and the "triumph of capitalism" had deadened democracy and created a permanent overclass, Forbes's 2010 list of billionaires would today be populated by Rockefellers, Morgans and Carnegies. The main legacy of titans, former or current, is that the innovations they support will produce social benefits, from the steel-making to the Internet.

The second failing of "Colossus" is its perpetuation of the robber-baron myth. Years ago, historian Burton Folsom noted the difference between what he labeled political entrepreneurs and market entrepreneurs. The political entrepreneur tends to compete over finite assets--or even to steal them--and therefore deserves the "robber baron" moniker. An example that Mr. Folsom provided: the ferry magnate Robert Fulton, who operated successfully on the Hudson thanks to a 30-year exclusive concession from the New York state legislature. Russia's petrocrats nowadays enjoy similar protections. Neither Fulton nor the petrocrats qualify as true capitalists.

Market entrepreneurs, by contrast, vanquish the competition by overtaking it. On some days Cornelius Vanderbilt was a political entrepreneur--perhaps when he ruined those traitorous partners, for instance. But most days Vanderbilt typified the market entrepreneur, ruining Fulton's monopoly in the 1820s with lower fares, the innovative and cost-saving tubular boiler and a splendid advertising logo: "New Jersey Must Be Free." With market entrepreneurship, a third party also wins: the consumer. Market entrepreneurs are not true robbers, for their ruining serves the common good.



For the full review, see:

AMITY SHLAES. "An Age of Creative Destruction." The Wall Street Journal (Sat., October 16, 2010): C7.

(Note: the online version of the article is dated October 29 (sic), 2010.)


The book under critical review by Shlaes:

Brands, H.W. American Colossus: The Triumph of Capitalism, 1865-1900. New York: Doubleday, 2010.


The Folsom book rightly praised in passing by Shlaes is:

Folsom, Burton W. The Myth of the Robber Barons. 4th ed: Young America's Foundation, 2003.





October 16, 2010

Long and Unknown Incubation Time Sometimes Needed for Innovation



(p. 118) The incubation stage is the most mysterious of the three stages of divergent thinking. Sometimes it appears as if the problem-solving process has stopped altogether.

Incubation is the absolute opposite of the normal business processes of the operating organization. It is often totally unpredictable. But since it is also the heart of the creative process, it creates a dilemma for the business executive who wants to support innovation but has little patience for unfocused activity. In the incubation period, observations stew on the edge of consciousness until something clarifies. As Newton observed, "I keep the subject constantly before me, and wait until the first dawnings open slowly, little by little, into the full and clear light."

There is no way to plan "enough" incubation time. What, then, can one do to improve the productivity of this period of incubation? One useful tool is what psychologists call "suspending disbelief--suspending judgment on data or observations that seem to make no sense. It allows time for the rearrangement of data, allowing one time to find new images that explain or illustrate how things might work. Suspending disbelief (p.119) is essential to avoiding premature closure on an issue, or entrenchment in existing ideas and approaches. Suspending disbelief helps to improve one's chances of finding a fresh view of the universe. It is an unnatural act for an operating organization, but an essential trait for an innovative organization.

A second useful tool is to deconstruct the problem so that you can recombine elements of it and gain fresh insight. Sir James Black, Nobel Prize winner for the discovery of histamine antagonists, suggests that one "turn the question around." Dr. Black prefers an "oblique attack" to a problem rather than a direct one.

One way to change context, Csikszentmihalyi observes, is to position yourself at the intersection of different cultures or disciplines: "where beliefs, lifestyles, and knowledge mingle and allow individuals to see new combinations of ideas with greater ease. In cultures that are uniform and rigid it takes a greater investment of attention to achieve new ways of thinking. In other words, creativity is more likely in places where new ideas require less effort to be perceived."




Source:

Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market---and How to Successfully Transform Them. New York: Currency Books, 2001.





October 12, 2010

Forecasting Errors Increase in Complex Environments




(p. 54) There is a great deal of evidence that suggests that when people-- for example, investors and managers--are taken out of a familiar environment--an environment of continuity--their ability to deal with the future deteriorates rapidly. John Sterman, J. Spencer Standish professor of management and director of the System Dynamics Group of MIT, who has studied the ability of managers to learn over long periods of time, says that in complex environments, the more experience people have the more poorly they perform. Here is a distillation of Sterman's findings:


• "Even in perfectly functioning markets, modest levels of complexity cause large and systematic deviations from rational behavior."
• "There is little evidence of adaptation of one's 'rules' as the complexity of the task increases." When the environment is complex, people seem to revert to simple rules that ignore time delays and feedback, leading to lowered performance.
• Individuals "forecast by averaging past values and extrapolating past trends. [They] actually spend less time making their decisions in the complex markets than in the simple ones."
• The lowered performance people exhibit as a result of greater com-(p. 55)plexity does not improve with experience. People become "less responsive to critical variables and more vulnerable to forecasting errors--their learning hurts their ability to perform well in the complex conditions."
• Most individuals do not learn how to improve their performance in complex conditions. In relatively simple conditions--without time delays or feedback--people "dramatically outperform the 'do nothing' rule, but in complex situations many people are bested by the 'do nothing' rule." Attempts individuals make to control the system are counterproductive.

Markets that are undergoing rapid or discontinuous change are extremely complex. Economic systems are highly networked and involve substantial feedback. Given Professor Sterman's findings, it is not surprising that forecasting deteriorates in the face of rapid change.



Source:

Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market---and How to Successfully Transform Them. New York: Currency Books, 2001.





October 7, 2010

Creative Destruction Book Is Useful for Documenting Dynamism of U.S. Firms



CreativeDestructionBK.jpg












Source of book image: http://www.innovation-creative.com/IMAGES/Livres_innovation_2/Foster_&_Kaplan/Foster_&_Kaplan-(US).jpg



The first couple of chapters of Creative Destruction are useful at providing some statistics on the degree of dynamism in U.S. companies over the past century or so.

In the rest of the book the authors present some interesting examples and refer to some useful research, but too often fall into the too-quick and too-easy management fad-advice mode---and Christensen and Raynor make a sound point in claiming that Foster and Kaplan sometimes oversell their main point.

Still there is some thought-provoking material here and there. I will be quoting a couple of the neater insights in the next couple of weeks.


Book discussed:

Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market---and How to Successfully Transform Them. New York: Currency Books, 2001.





June 17, 2010

Scientific Calculators Creatively Destroyed Slide Rules



(p. 120) I'd been a slide rule whiz in high school, so when I saw the calculator, it was just amazing. A slide rule was kind of like a ruler-- you had to look at it precisely to read the values. The most accurate number you could get was only three digits long, however, and even that result was always questionable. With a calculator, you could punch in precisely the digits you wanted. You didn't have to line up a slider. You could type in your numbers exactly, hit a button, and get an answer immediately. You could get that number all the way out to ten digits. For example, the real answer might be 3.158723623. An answer like that was much more precise than anything engineers had ever gotten before.

Well, the HP 35 was the first scientific calculator, and It was the first in history that you could actually hold in your hand. It could calculate sines and cosines and tangents, all the trigonometric and exponential/logarithmic functions engineers use to calculate and to do their jobs. This was 1973, and back then cal-(p. 121)culators--especially handheld calculators--were a very, very big deal.


. . .


There was no doubt in my mind that calculators were going to put slide rules out of business. (In fact, two years later you couldn't even buy a slide rule. It was extinct.) And now all of a sudden I'd gotten a job helping to design the next generation of these scientific calculators. It was like getting to be a part of history.



Source:

Wozniak, Steve, and Gina Smith. iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It. New York: W. W. Norton & Co., 2006.

(Note: ellipsis added.)





June 1, 2010

When Life Really Stunk



(p. 51) The situation of the rural town of Marney was one of the most delightful easily to be imagined. In a spreading dale, contiguous to the margin of a dear and lively stream, surrounded by meadows and gardens, and backed by lofty hills, undulating and richly wooded, the traveller (sic) on the opposite heights of the dale would often stop to admire the merry prospect that recalled to him the traditional epithet of his country.

Beautiful illusion! For behind that laughing landscape, penury and disease fed upon the vitals of a miserable population.

The contrast between the interior of the town and its external aspect was as striking as it was full of pain. With the exception of the dull high street, which had the usual characteristics of a small agricultural market town, some sombre mansions, a dingy inn, and a petty bourse, Marney mainly consisted of a variety of narrow and crowded lanes formed by cottages built of rubble, or unhewn stones without cement, (p. 52) and, from age or badness of the material, looking as if they could scarcely hold together. The gaping chinks admitted every blast; the leaning chimneys had lost half their original height; the rotten rafters were evidently misplaced; while in many instances the thatch, yawning in some parts to admit the wind and wet, and in all utterly unfit for its original purpose of giving protection from the weather, looked more like the top of a dunghill than a cottage. Before the doors of these dwellings, and often surrounding them, ran open drains full of animal and vegetable refuse, decomposing into disease, or sometimes in their imperfect course filling foul pits or spreading into stagnant pools, while a concentrated solution of every species of dissolving filth was allowed to soak through, and thoroughly impregnate, the walls and ground adjoining.

These wretched tenements seldom consisted of more than two rooms, in one of which the whole family, however numerous, were obliged to sleep, without distinction of age, or sex, or suffering. With the water streaming down the walls, the light distinguished through the roof, with no hearth even in winter, the virtuous mother in the sacred pangs of childbirth gives forth another victim to our thoughtless civilisation (sic); surrounded by three generations whose inevitable presence is more painful than her suffering in that hour of travail; while the father of her coming child, in another corner of the sordid chamber, lies stricken by that typhus which his contaminating dwelling has breathed into his veins, and for whose next prey is perhaps destined his new-horn child. These swarming walls had neither windows nor doors sufficient to keep out the weather, or admit the sun, or supply the means of ventilation; the humid and putrid roof of thatch exhaling malaria like all other decaying vegetable matter. The dwelling-rooms were neither boarded nor paved; and whether it were that some were situate in low and damp places, occasionally flooded by the river, and usually much below the level of the road; or that the springs, as was often the case, would burst through the mud floor; the ground was at no time better than so much clay, while sometimes you might see little channels cut from the centre under the doorways to carry off the water, the door itself removed from its hinges; a resting-place for infancy in its deluged home. These hovels were in many instances not (p. 53) provided with the commonest conveniences of the rudest police; contiguous to every door might be observed the dungheap on which every kind of filth was accumulated, for the purpose of being disposed of for manure, so that, when the poor man opened his narrow habitation in the hope of refreshing it with the breeze of summer, he was met with a mixture of gases from reeking dunghills.



Source:

Disraeli, Benjamin. Sybil. paperback ed, Oxford World's Classics. Oxford, UK: Oxford University Press, 2009 [1845].





May 9, 2010

Maddison Showed Per Capita Income Stagnation from 1000 AD - 1820 AD



MaddisonAngus2010-05-05.gif











Angus Maddison. Source of photo: http://www.ggdc.net/maddison/



I neither met Angus Maddison, nor ever heard him speak, but I have often seen his work praised by those whom I respect.

One example is the praise given to Maddison by Brad DeLong in his wonderful "Cornucopia" essay that documents the benefits from the process of creative destruction.


(p. B10) Professor Maddison, a British-born economic historian with a compulsion for quantification, spent many of his 83 years calculating the size of economies over the last three millenniums. In one study he estimated the size of the world economy in A.D. 1 as about one five-hundredth of what it was in 2008.

He died on April 24 at a hospital in Paris after a long illness, his daughter, Elizabeth Maddison, said.


. . .


In his research, he tried to reconstruct thousands of years' worth of economic data, most notably in his 2007 book "Contours of the World Economy 1-2030 A.D.." He argued that per capita income around the globe had remained largely stagnant from about 1000 to 1820, after which the world became exponentially richer and life expectancies surged.


. . .


In his archaeological excavation of the economies of other eras, he was "trying to explain why some countries achieved faster growth or higher income levels than others," he wrote in an autobiographical essay, "Confessions of a Chiffrephile" published in 1994. He wanted to know what some countries did right and what others did wrong, and to figure out how growth influenced culture, and was influenced by it.

Professor Maddison often referred to himself as a "chiffrephile," or lover of numbers, a term he invented to characterize economists and economic historians like himself who were prone to quantifying the world.

While macroeconomic research in the last few decades was dominated by elegant mathematical models and technical wizardry, his focus on meat-and-potatoes data and cross-country historical comparisons has come back into vogue in recent years, especially in the wake of the financial crisis.



For the full obituary, see:

CATHERINE RAMPELL. "Angus Maddison, 83, Who Quantified Ancient Economies." The New York Times (Mon., May 3, 2010): B10.

(Note: ellipses added.)

(Note: the online version of the obituary is dated April 30, 2010 and has the title "Angus Maddison, Economic Historian, Dies at 83.")


The Maddison book mentioned in the obituary is:

Maddison, Angus. Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History. Oxford and New York: Oxford University Press, 2007.





May 5, 2010

Leapfrog Competition in the Wine Industry



PlasticCork2010-05-04.jpg

"A machine makes Portugal whine." Source of caption: print version of the WSJ article quoted and cited below. Source of photo: online version of the WSJ article quoted and cited below.


(p. A1) ZEBULON, N.C.--In a nondescript factory in this small, wooded town, 10 giant machines worked around the clock last year to churn out 1.4 billion plastic corks, enough to circle the earth 1.33 times if laid end-to-end.

Unknown to most American wine drinkers, the plant's owner, Nomacorc LLC, has quietly revolutionized the 400-year-old wine-cork industry. Since the 1600s, wine has been bottled almost exclusively with natural cork, a porous material that literally grows on trees in Portugal, Spain and other Mediterranean lands.

But over the past 10 years, an estimated 20% of the bottle stopper market has been replaced by a new technology--plastic corks that cost between 2 and 20 cents apiece. More than one in 10 full-sized wine bottles sold worldwide now come with a Nomacorc plug, while another 9% or so come from other plastic cork makers. Screw caps took another 11% of the market.

"We infuriated the cork industry," says Marc Noel, Nomacorc's chairman.


. . .


The story of how Nomacorc and other stop-(p. A10)per upstarts broke the centuries-old cork monopoly is a lesson in how innovation, timing and hustle combined to exploit an opening in a once airtight market. It shows that any dominant industry can be vulnerable to competition, especially if it grows complacent about its position.



For the full story, see:

TIMOTHY AEPPEL. "Show Stopper: How Plastic Popped the Cork Monopoly." The Wall Street Journal (Sat., MAY 1, 2010): A1 & A10.

(Note: ellipsis added.)


CorkPieChart2010-05-04.gif













Source of graph: online version of the WSJ article quoted and cited above.






April 29, 2010

New York City Would Creatively Adapt to Global Warming



NewYorkWaterfrontNewLandscape2010-04-26.jpg "Rising Currents: Projects for New York's Waterfront In this MoMA show, a model by Architecture Research Office marries a wholly new landscape to Lower Manhattan's streets." Source of caption and photo: online version of the NYT article quoted and cited below.


Much is in doubt about "global warming" including how much the globe will warm, and how fast, to what extent the benefits of global warming would balance the costs, and what actions (such as Nathan Myhrvold's creative plan) might be taken to counteract global warming.

But one certainty is that if governments leave innovative entrepreneurial capitalism alone, human creativity will find ways to adapt in order to increase the benefits and reduce the costs.

Few cities have displayed as much creative destruction in architecture as New York. (One book on New York architecture was even called The Creative Destruction of Manhattan"). The article quoted below describes some visions of how New York City might adapt to an increase in sea level that might result from global warming.


(p. C21) "Rising Currents: Projects for New York's Waterfront," a new show at the Museum of Modern Art, reflects a level of apocalyptic thinking about this city that we haven't seen since it was at the edge of financial collapse in the 1970s, a time when muggers roamed freely, and graffiti covered everything.

Organized by Barry Bergdoll, the Modern's curator of architecture and design, the show is a response to the effects that rising sea levels are expected to have on New York City and parts of New Jersey over the next 70 or so years, according to government studies. The solutions it proposes are impressively imaginative, ranging from spongelike sidewalks to housing projects suspended over water to transforming the Gowanus Canal into an oyster hatchery.


. . .


(p. C23) A general interest in re-examining parts of the urban fabric that we take for granted, like streets, piers and canals -- as opposed to the more familiar desire to create striking visual objects -- is one of the main strengths of the exhibition. A team led by Matthew Baird Architects, for example, has focused on a huge oil refinery in Bayonne, N.J., that, if current estimates hold, will be entirely under water before our toddlers have hit retirement age. Rather than taking the predictable and bland route of transforming the industrial site into a park, the team proposes a system of piers that would support bio-fuel and recycling plants, including one that would produce the building blocks for artificial reefs out of recycled glass.

Those large, multipronged objects, which the architects call "jacks," could be dumped off boats in strategically chosen locations, where their forms would naturally interlock to create artificial reefs once they settled at the bottom of the harbor. The jacks are magical objects, at once tough and delicate, and when you see examples of them from across the room at MoMA, their heavy legs and crushed glass surfaces make them look almost like buildings.

But here again, what's really commendable about the design is the desire to look deeper into how systems -- in this case, global systems, both natural and economic -- work. According to Mr. Baird's research, the melting of the ice cap could one day create a northern shipping passage that would make New York Harbor virtually obsolete. The manufacturing component of the design is meant as part of a broader realignment of the city's economy that anticipates that shift.




For the full story, see:

NICOLAI OUROUSSOFF. "Architecture Review; The Future: A More Watery New York." The New York Times (Fri., March 26, 2010): C21 & C23.

(Note: ellipsis added.)

(Note: The online version of the article is dated March 25, 2010 and has the title "Architecture Review; 'Rising Currents: Projects for New York's Waterfront'; Imagining a More Watery New York.")


The book I mention in my comments is:

Page, Max. The Creative Destruction of Manhattan, 1900-1940. Chicago: University of Chicago Press, 2000.





April 20, 2010

"We Don't Lie Out Here; We Just Remember Big"



(p. W11) Americans love a winner and they remember what they want to remember, and so let us now remember the Central Overland California & Pike's Peak Express Co.--known from the day it began 150 years ago on April 3, 1860, as the Pony Express.

We remember the Pony Express as one of the most enduring and endearing of American stories, a tale of the frontier, a story of bold entrepreneurs, daring young horsemen, true riders of the purple sage and all that. In truth, the venture hemorrhaged money from day one, was doomed by technology (another particularly American story), lasted a mere 78 weeks, ruined its backers and then disappeared into what historian Bernard DeVoto called "the border land of fable." Across the wide Missouri, fact and fantasy collided and the Pony Express became "a tale of truth, half-truth and no truth at all," as another historian observed.


. . .


The service was shut down in the flash of a telegrapher's key when the transcontinental telegraph was completed in October 1861. The records of the business, if there were any records, were lost. That would prove liberating for later chroniclers.


. . .


If the Pony Express continues to thrill and baffle us, consider the words of an old horseman in western Nebraska who advised me when I expressed some concerns about the pedigree of this yarn. "We don't lie out here," he explained kindly. "We just remember big."




For the full commentary, see:

CHRISTOPHER CORBETT. "Real (and Fake) Hoofbeats of the Pony Express." The Wall Street Journal (Fri., APRIL 2, 2010): W11.

(Note: ellipses added.)





March 9, 2010

The Entrepreneur as the Agent of Creative Destruction



(p. 132) . . . the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on. Railroad construction in its earlier stages, electrical power production before the First World War, steam and steel, the motorcar, colonial ventures afford spectacular instances of a large genus which comprises innumerable humbler ones--down to such things as making a success of a particular kind of sausage or toothbrush. This kind of activity is primarily responsible for the recurrent "prosperities" that revolutionize the economic organism and the recurrent "recessions" that are due to the disequilibrating impact of the new products or methods. To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside of the routine tasks which everybody understands and, secondly, because the environment resists in many ways that vary, according to social conditions, from simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it. To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function. This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.



Source:

Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.

(Note: ellipsis added.)





March 2, 2010

Light in "Meet Me in St. Louis"



MeetMeInSaintLouisLights2010-02-07.jpgSource of photo: http://www.thejudyroom.com/louis/pictures/mmisldvd%23674.html


As Brad DeLong has noted, we take for granted the spectacular technological advances of the last 200, and especially, the last 100 years. One of the more notable of these, the spread of electricity that allowed electric illumination, occurred around the year 1900.

We forget how electric illumination made cities safer, and increased our freedom to choose the timing of work and leisure activities.

The awe inspired by electric lights also usually has been forgotten, but is occasionally recalled. One good source is a segment of a documentary produced by UNO television in 1998, to mark the centennial of Omaha's long-forgotten Trans-Mississippi Exposition.

I recently ran across another in viewing the closing scenes of the Judy Garland classic "Meet Me in St. Louis." In the final scene, the family finally makes it to the St. Louis Fair, and observes the display of electric lights.


For DeLong's comment, peruse the early pages of his marvelous draft:

DeLong, J. Bradford. "Cornucopia: The Pace of Economic Growth in the Twentieth Century." NBER Working Paper w7602, March 2000.

The UNO documentary had the unfortunate title "Westward the Empire: Omaha's World Fair of 1898."



MeetMeInSaintLouisViewingLights2010-02-07.jpgSource of photo: http://www.thejudyroom.com/louis/pictures/judytomlarge.html





January 18, 2010

Establishments Assume New Methods Are Unsound Methods



(p. 188) For the next two years, Conway coordinated her efforts under Sutherland at PARC with Mead's ongoing work at Caltech. But she was frustrated with the pace of progress. There was no shortage of innovative design ideas; computerized design tools had advanced dramatically since Mead's first efforts several years before. Yet the industry as a whole continued in the old rut. As Conway put it later, the problem was "How can you take methods that are new, methods that are not in common use and therefore perhaps considered unsound methods, and turn them into sound methods?" [Conway's italics].

She saw the challenge in the terms described in Thomas Kuhn's popular book The Structure of Scientific Revolutions. it was the problem that took Boltzmann to his grave. It was the problem of innovation depicted by economist Joseph Schumpeter in his essays on entrepreneurship: new systems lay waste to the systems of the past. Creativity is a solution for the creator and the new ventures he launches. But it wreaks dissolution--"creative destruction," in Schumpeter's words-- for the defenders of old methods. In fact, no matter how persuasive the advocates of change, it is very rare that an entrenched establishment will reform its ways. Establishments die or retire or fall in revolution; they only rarely transform themselves.




Source:

Gilder, George. Microcosm: The Quantum Revolution in Economics and Technology. Paperback ed. New York: Touchstone, 1990.

(Note: italics in original.)





December 28, 2009

Doctorow's "Makers" Novel Paints Unrealistically Bleak View of Life with Creative Destruction



MakersBK.jpg















Source of book image: http://www.globalnerdy.com/wordpress/wp-content/uploads/2009/11/makers.jpg



Awhile back I mentioned a science fiction book that made use of the process of creative destruction. Here's a discussion of another one---called Makers, it apparently adopts the unlikely premise that a world of creative destruction would have a 20% unemployment rate. (I say "unlikely" because the evidence is that in a world of creative destruction, as many new jobs are created as old ones are destroyed.)


(p. A19) Consider the world of "Makers," the latest by best-selling writer Cory Doctorow. This novel is set in a not-too distant future, when the creative destruction of technological change has created an economy so efficient, with profit margins so thin, that traditional companies can hardly stay in business.

The inventor-heroes of "Makers" take technology to its conclusion: They figure out a way to use three-dimensional printers to produce copies of machines and most anything else at close to no cost. This sparks "New Work," with geeky investment bankers scouring the country to fund promising artisans who use the technology to build things cheaply. The heroes also run a series of entertainment rides across the country in abandoned Wal-Marts, until Disney unleashes its lawyers on them.

Mr. Doctorow, a Canadian living in London, has a keen eye for the pressures on contemporary business. In the novel, an M.B.A. brought in to work with the inventors explains, "The system makes it hard to sell anything above the marginal cost of goods, unless you have a really innovative idea, which can't stay innovative for long, so you need continuous invention and reinvention, too."


. . .


In the world of "Makers," and perhaps in our own world, "we're approaching a kind of pure and perfect state now, with competition and invention getting easier and easier--it's producing a kind of superabundance."

Mr. Doctorow paints a bleak picture of the process of getting there, even if many of us take a more benign view of increasingly efficient capitalism. "Makers" features widespread unemployment, with 20% of workers relocating to look for jobs. Even with scientific advances--obesity is solved, for example--life is brutal. There are squatter neighborhoods alongside abandoned strip malls.




For the full story, see:

L. GORDON CROVITZ. "Technology Is Stranger Than Fiction; Best-selling writer Cory Doctorow on change and its discontents." The Wall Street Journal (Mon., NOVEMBER 23, 2009): A19.

(Note: ellipsis added.)





November 10, 2009

John Mackey: "I Believe in the Dynamic Creativity of Capitalism"



MackeyJohn2009-10-28.jpg Whole Foods CEO John Mackey. Source of the caricature: online version of the WSJ interview quoted and cited below.



(p. A11) "I honestly don't know why the article became such a lightning rod," says John Mackey, CEO and founder of Whole Foods Market Inc., as he tries to explain the firestorm caused by his August op-ed on these pages opposing government-run health care.


. . .


. . . his now famous op-ed incited a boycott of Whole Foods by some of his left-wing customers. His piece advised that "the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us closer to a complete government takeover of our health-care system." Free-market groups retaliated with a "buy-cott," encouraging people to purchase more groceries at Whole Foods.


. . .


What Mr. Mackey is proposing is more or less what he has already implemented at his company--a plan that would allow more health savings accounts (HSAs), more low-premium, high-deductible plans, more incentives for wellness, and medical malpractice reform. None of these initiatives are in any of the Democratic bills winding their way through Congress. In fact, the Democrats want to kill HSAs and high-deductible plans and mandate coverage options that would inflate health insurance costs.


. . .


Mr. Mackey's latest crusade involves traveling to college campuses across the country, trying to persuade young people that business, profits and capitalism aren't forces of evil. He calls his concept "conscious capitalism."

What is that? "It means that business has the potential to have a deeper purpose. I mean, Whole Foods has a deeper purpose," he says, now sounding very much like a philosopher. "Most of the companies I most admire in the world I think have a deeper purpose." He continues, "I've met a lot of successful entrepreneurs. They all started their businesses not to maximize shareholder value or money but because they were pursuing a dream."

Mr. Mackey tells me he is trying to save capitalism: "I think that business has a noble purpose. It's not that there's anything wrong with making money. It's one of the important things that business contributes to society. But it's not the sole reason that businesses exist."

What does he mean by a "noble purpose"? "It means that just like every other profession, business serves society. They produce goods and services that make people's lives better. Doctors heal the sick. Teachers educate people. Architects design buildings. Lawyers promote justice. Whole Foods puts food on people's tables and we improve people's health."

Then he adds: "And we provide jobs. And we provide capital through profits that spur improvements in the world.


. . .


"I don't think anybody's too big to fail," he says. "If a business fails, what happens is, there are still assets, and those assets get reorganized. Either new management comes in or it's sold off to another business or it's bid on and the good assets are retained and the bad assets are eliminated. I believe in the dynamic creativity of capitalism, and it's self-correcting, if you just allow it to self-correct."

That's something Washington won't let happen these days, which helps explain why Mr. Mackey felt compelled to write that the Whole Foods health-insurance program is smarter and cheaper than the latest government proposals.



For the full interview, see:

STEPHEN MOORE. "The Conscience of a Capitalist; The Whole Foods founder talks about his Journal health-care op-ed that spawned a boycott, how he deals with unions, and why he thinks CEOs are overpaid." The Wall Street Journal (Sat., OCTOBER 3, 2009): A11.

(Note: ellipses added.)





October 5, 2009

The Economist Starts a Column Named "Schumpeter"



SchumpeterAirplaneGraphic.jpg











Source of Schumpeter stairway to innovation graphic (my name for it): http://media.economist.com/images/20090919/D3809WB0.jpg


Thanks to Shane Eloe for alerting me that in their Sept. 19th issue, The Economist started a column named "Schumpeter." Here are a couple of paragraphs from their first installment:


(p. 78) Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence. "Queen Elizabeth [I] owned silk stockings," he once observed. "The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort...The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses." But Schumpeter knew far too much about the history of business to be a cheerleader. He recognised that business people are often ruthless monomaniacs, obsessed by their dreams of building "private kingdoms" and willing to do anything to crush their rivals.

Schumpeter's ability to see business straight would be reason enough to name our new business column after him. But this ability rested on a broader philosophy of capitalism. He argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a "perennial gale of creative destruction".




For the full commentary, see:

"Schumpeter; Taking flight; This week we launch a new column on business and management. Why call it Schumpeter?" The Economist (Sat., Sept. 19, 2009): 78.

(Note: the online version was dated Thurs., Sept. 17th)

(Note: ellipsis in original.)





September 23, 2009

Scientists Believe Life Emerged from a Process of "Creative Destruction" and Global Warming



CosmicCrashSite2009-09-07.jpgSource of graphic: online version of the WSJ article quoted and cited below.


(p. A9) In a paradox of creation, new evidence suggests that devastating avalanches of cosmic debris may have fostered life on Earth, not annihilated it. If so, life on our planet may be older than scientists previously thought -- and more persistent.

Astronomers world-wide have been transfixed by a roiling gash the size of Earth in the atmosphere of Jupiter, caused by an errant comet or asteroid that smashed into the gas giant last month. The lingering turbulence is an echo of a cataclysmic bombardment that shaped the origin of life here 3.9 billion years ago, when millions of asteroids, comets and meteors pummeled our planet.


. . .


But in their super-heated plunge through the atmosphere, these asteroids and meteors may have helped create conditions ideal for emerging life. "Everyone focuses on the meteor that hits the ground," says geochemist Richard Court at London's Imperial College. "No one thinks about the products of its journey that get pumped into the atmosphere."

As they vented, they collectively could have imported billions of tons of life-sustaining water into the air every year, Dr. Court and his colleague Mark Sephton recently determined. They calculated that these showers of volatile rocks delivered 10 times the daily outflow of the Mississippi River every year for 20 million years. By analyzing the fumes emitted under such extreme heat, they discovered these rocks also could have injected billions of tons of carbon dioxide into the air every year.

Combined with so much water vapor, the carbon dioxide could have induced a global greenhouse effect. That could have kept any life emerging on Earth safely in a planetary incubator at a time when the planet might easily have frozen because the Sun radiated 25% less energy than today. "The amount of CO2 that was produced is about the same we produce today through fossil fuel use and we know that is a climate-changing volume," says Dr. Court.


. . .


"It is literally a revolution in our ideas about how our solar system evolved," says asteroid expert William Bottke at the Southwest Research Institute. "It could be that our form of life today -- every living thing that we see today -- is due to this bombardment that happened 3.9 billion years ago."



For the full commentary, see:

ROBERT LEE HOTZ. "SCIENCE JOURNAL; Some Creative Destruction on a Cosmic Scale; Scientists Say Asteroid Blasts, Once Thought Apocalyptic, Fostered Life on Earth by Carrying Water and Protective Greenhouse Gas." The Wall Street Journal (Fri., AUGUST 14, 2009): A9.

(Note: ellipses added.)





August 31, 2009

Creative Destruction Is Scary, but "Inevitable and Probably Even Desirable"



(p. 5) Development is a complicated phenomenon. Decades before he popularized the phrase "creative destruction," Joseph Schumpeter, the Austrian School economist, was honing his ideas about innovation and disruptive change in "The Theory of Economic Development."

Disruptive change, creative destruction, is what I'm living every day. In the big cities, India's economic development can seem so simple. Business thrives, the middle and upper classes are celebrating, and the country is moving inexorably ahead.

But around here, where a way of life is disappearing and no one knows what will take its place, where someone seems to lose for everyone who wins, it's a lot harder to know what to make of India's economic boom. From my vantage point, development seems both wonderful and frightening; it is both inspiring and, at times, dispiriting.

People sometimes ask me how I feel about India's economic development. I tell them the truth. I say I don't know. I say I feel ambivalent about the passing of a world I knew as a child, a transition that I know is inevitable and probably even desirable. But I haven't reconciled myself to it yet.



For the full commentary, see:

AKASH KAPUR. "An Indian Says Farewell to Poverty, With Jitters." The New York Times, Week in Review Section (Sun., August 8, 2009): 5.






August 19, 2009

"Established Experts Flee in Horror to All Available Caves and Cages"



(p. 96) While science and enterprise open vast new panoramas of opportunity, our established experts flee in horror to all available caves and cages, like so many primitives, terrified by freedom and change.


Source:

Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.





August 18, 2009

Wattenberg's Corporate Graveyard Illustrates Creative Destruction







The clip is the famous corporate graveyard scene from Ben Wattenberg's 1977 "In Search of the Real America: A Challenge to the Chorus of Failure and Guilt." The scene appears in the first of 13 episodes, the episode called "There's No Business Like Big Business" which received the Tuck Award for the Advancement of Economic Understanding. The episode was produced and written by Austin Hoyt.

The corporate graveyard scene illustrates that under entrepreneurial capitalism, companies prosper that innovate in better serving the consumer.



URL address for graveyard scene video clip:

http://www.youtube.com/watch?v=DDMNYLiBexo


Wattenberg discussed the "In Search of the Real America" program, and the graveyard scene, in his recent book Fighting Words:

(p. 307) The central point of the program was that if big American corporations didn't compete effectively, they suffer, and many would go out of business.

The producers had the wonderful idea of a visual of a graveyard on a foggy night, with headstones made from papier-mâché and a smoke machine providing the fog. I walked through the mock cemetery in a raincoat and read off the names of corporate tombstones, which included Central Leather (the seventeenth largest company in 1917), International Mercantile Marine (the eleventh largest in 1917), as well as failures like Baldwin Locomotive Works, American Woolen, Packard Motor Car, International Match, Pierce Petroleum, Curtiss-Wright, United Verde Mining, and Consolidation Coal.2 When we showed the Central Leather tombstone, a sound effect mooed; behind International Mercantile Marine's, a steamship horn bellowed (I love shtick).


. . .


2 The program was based on an article by James Michaels, editor of Forbes. For many years, people would come up to me in airports, recalling that one scene and complementing me on the program.



Source:

Wattenberg, Ben J. Fighting Words: A Tale of How Liberals Created Neo-Conservatism
. New York: Thomas Dunne Books, 2008.

(Note: ellipsis added.)

(Note: I have corrected a few obvious errors involving the omission and placement of commas in the list of companies in the text of Wattenberg's Fighting book.)



. . . , Mr. Michaels graduated from Harvard in 1943 with a bachelor's degree in economics.

Source:

RICHARD PÉREZ-PEÑA. "James Michaels, Longtime Forbes Editor, Dies at 86." The New York Times (October 4, 2007).

(Note: of course, Joseph Schumpeter was a member of the Harvard faculty in 1943, and published the first edition of Capitalism, Socialism and Democracy in 1942.)



FightingWordsBK.jpg















Source of book image: http://media.us.macmillan.com/jackets/500H/9780312382995.jpg






August 11, 2009

Economists Better at Measuring Destruction than Creativity



(p. 49) As entrepreneurs accelerate the processes of creative destruction that impel all economic advance, the economists measure the destruction, but not the creativity. They see the sinking value of existing capital but neglect the new ideas, hopes, enthusiasms, and plans of entrepreneurs.


Source:

Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.





July 30, 2009

Today's Middle Class Citizens of the U.S. Are Better Off Than Emperor Tiberius, Emperor Napoleon, and Saint Thomas Aquinas



In conversation at the HES meeting in Denver, Pete Boettke mentioned that the opportunity cost of blogging can be very high.

The passage below is from a draft of a key chapter of a long-awaited book authored by Berkeley economist and world-renowned blogger Brad DeLong. (At least in this case, Boettke is right.)


(p. 3) Could the Emperor Tiberius have eaten fresh grapes in January? Could the Emperor Napoleon have crossed the Atlantic in a night, or gotten from Paris to London in two hours? Could Thomas Aquinas have written a 2000-word letter in two hours--and then dispatched it off to 1,000 recipients with the touch of a key, and begun to receive replies within the hour? Computers, automobiles, airplanes, VCR' s, washing machines, vacuum cleaners, telephones, and other technologies--combined with mass production--give middle-class citizens of the United States today degrees of material wealth--control over commodities, and the ability to consume services--that previous generations could barely imagine.



Source:

DeLong, J. Bradford. "Cornucopia: The Pace of Economic Growth in the Twentieth Century." NBER Working Paper, w7602, 2000.





May 4, 2009

Do Recessions Sometimes Encourage Creative Destruction?



DesktopPCbroken2009-02-15.jpg Source of image: online version of the NYT article quoted and cited below.


(p. B1) The dot-com bust earlier in the decade dragged down high-fliers like Sun Microsystems and America Online but set the stage for a new generation of Web powerhouses like Google and other innovative Internet software companies like Salesforce.com, founded on disrupting the status quo.

The recession of the early 1990s sent I.B.M., then the dominant force in technology, into a five-year tailspin. But it also propelled Microsoft and Compaq, later acquired by Hewlett-Packard, and Dell to the forefront of computing.

Indeed, Silicon Valley may be one of the few places where businesses are still aware of the ideas of Joseph Schumpeter, an Austrian economist who wrote about business cycles during the first half of the last century. He said the lifeblood of capitalism was "creative destruction." Companies rising and falling would unleash innovation and in (p. B4) the end make the economy stronger.

Recessions "can cause people to think more about the effective use of their assets," said Craig R. Barrett, the retiring chairman of Intel, who has seen 10 such downturns in his long career. "In the good times, you can get a bit careless or not focused as much on efficiency. In bad times, you're forced to see if there is a technology" that will help.

So who's up, who's down and who's out this time around? Microsoft's valuable Windows franchise appears vulnerable after two decades of dominance. Revenue for the company's Windows operating system fell for the first time in history in the last quarter of 2008. The popularity of Linux, a free operating system installed on many netbooks instead of Windows, forced Microsoft to lower the prices on its operating system to compete.

Intel's high-power processors are also under assault: revenue tumbled by 23 percent last quarter, marking the steepest decline since 1985.

Meanwhile, more experimental but lower-cost technologies like netbooks, Internet-based software services (called cloud computing) and virtualization, which lets companies run more software on each physical server, are on the rise.



For the full story, see:

BRAD STONE and ASHLEE VANCE. "$200 Laptops Break a Business Model." The New York Times (Mon., January 25, 2009): B1 & B4.






March 10, 2009

Larry Moss Made a Difference



MossLarry2009-03-09.jpg












Laurence S. Moss

Source of photo: http://www3.babson.edu/academics/faculty/lmoss.cfm



On Sunday (3/8/09) I learned that Larry Moss passed away on February 24, 2009.

Larry was full of the joy of life. He was intense. He was an amateur magician, and a wit, and an energetic conversationalist. I used to run into him once a year at the History of Economics Society meetings, and always enjoyed our conversations.

He was a neo-Austrian, though not "pure" enough for some of the ultra-Rothbardians. I first met him at a long-weekend seminar in Austrian economics when I was a graduate student, and he was a presenter.

I remember that he and I thought that the dialogue would be richer, and the neo-Austrian position ultimately strengthened, if its defenders understood better some of the alternative positions. So we announced a kind of rump session during one of the free-time periods. During this session, Larry gave the attendees a brief summary of what Walras had been up to, and I summarized Becker's paper on the robustness of the law of demand to various forms of irrational and habitual behavior.

If memory serves, we suffered some mild heckling, and Larry was more severely criticized for disloyalty to the cause. (I cannot prove it, but I believe he paid a price for that in terms of invitations to future similar gatherings.)


I did not follow Larry's research systematically, but know that he wrote the definitive account of Mountifort Longfield's economics. He also had a nice, early paper in the JEL on the uses of film in teaching economics.

He took Schumpeter seriously, and wrote the script for the wonderful Schumpeter tapes in the Knowledge Products series on great economists that Kirnzer edited.

A couple of year's ago, I invited Larry to participate in the Schumpeter session that I organized at George Mason's Summer Institute for the Preservation of the History of Economic Thought. He initially agreed, but then had to withdraw because of his health.

More recently, I submitted one of my more idiosyncratic efforts (on the career consequences of writing on polywater) to the journal that Larry edited. I received excellent comments, and the editorial process was handled with grace and efficiency.


Larry was one of the "good guys" in many different ways, and the world is worse for his passing.


Here are a couple of Larry's more obscure writings, that I have found useful:

Moss, Laurence S. "Film and the Transmission of Economic Knowledge: A Report." Journal of Economic Literature 17, no. 3 (1979): 1005-19.

Moss, Laurence S. "Review: Robert Loring Allen's Biography of Joseph A. Schumpeter." American Journal of Economics and Sociology 52, no. 1 (1993): 107-18.

The reference to Larry's Schumpeter tapes is:

Moss, Laurence S. Joseph Schumpeter & Dynamic Economic Change: Capitalism as "Creative Destruction". Nashville, TN: Knowledge Products, Inc., 1988. audio.





February 8, 2009

A Toast to Schumpeter on His Birthday (February 8, 1883)


ForbesKeynesSchumpeterCover1983-05-23edited.jpg








Source: scan (and crop) of the cover of the May 23, 1983 issue of Forbes .


In the May 23, 1983 issue of Forbes there appeared a now-famous essay by the late and great management guru Peter Drucker in which he pointed out that 1983 was the centennial of the birth of both John Maynard Keynes and Joseph A. Schumpeter. He noted that in the decades since the great economists' passing, the academic and policy worlds worshiped at the feet of Keynes, and all but ignored Schumpeter (hence the many candles in front of the Keynes portrait on the cover, and the single, small candle in front of the Schumpeter portrait).

But Drucker argued that the world had gotten it wrong. Schumpeter was more important because he had understood a crucial truth: the process of creative destruction is indeed the essential fact about capitalism.


The reference for the original Drucker essay is:

Drucker, Peter F. "Modern Prophets: Schumpeter or Keynes?" Forbes, May 23, 1983, 124-28.

The reference to the reprint of the Drucker essay is:

Drucker, Peter F. "Modern Prophets: Schumpeter or Keynes?" In The Frontiers of Management New York: Penguin Putnam, Inc., 1999, 104-15.

A typo-laden version of the essay has been posted on the web at:

http://www.peterdrucker.at/en/texts/proph_01.html

(Note: I thank Aaron Brown for alerting me to the neat cover that appears at the top of this entry).




February 5, 2009

Inventors Move from Declining Industries to New, Expanding Industries


Petra Moser's comments (see below) about inventors applying similar ideas to different industries seem complementary to Burke's emphasis on the importance of serendipitous "connections." An inventor exposing herself to many industries' problems and products, would be more likely to see additional applications for inventions originally developed for another industry.

(p. 3) By some logic, there is no earthly reason why bicycles should still exist.

They are a quaint, 19th-century invention, originally designed to get someone from point A to point B. Today there are much faster, far less labor-intensive modes of transportation. And yet hopeful children still beg for them for Christmas, healthful adults still ride them to work, and daring teenagers still vault them down courthouse steps. The bicycle industry has faced its share of disruptive technologies, and it has repeatedly risen from the ashes.

. . .

"Much of the history of the 'American system of manufacturing' is the story of inventors moving from a declining industry to a new expanding industry," says Petra Moser, an economic historian at Stanford who studies innovation. "Inventors take their skills with them."

Gun makers learned to make revolvers with interchangeable parts in the mid-19th century, Ms. Moser says. Then those companies (and some former employees, striking out on their own) applied those techniques to sewing machines when demand for guns slackened. Later, sewing machine manufacturers began making woodworking machinery, bicycles, cars and finally trucks.

. . .

Meanwhile, we've already seen some of the "destruction" half of Joseph Schumpeter's famous "creative destruction" paradigm, with many newspapers cutting staff and other production costs. Unfortunately for newspapers, historians say, the survivors in previous industries facing major technological challenges were usually individual companies that adapted, rather than an entire industry. So a bigger shakeout may yet come.

But perhaps the destruction will lead to more creativity. Perhaps the people we now know as journalists -- or, for that matter, autoworkers -- will find ways to innovate elsewhere, just as, over a century ago, gun makers laid down their weapons and broke out the needle and thread. That is, after all, the American creative legacy: making innovation seem as easy as, well, riding a bike.



For the full commentary, see:

CATHERINE RAMPELL. "Ideas & Trends; How Industries Survive Change. If They Do." The New York Times, Week in Review Section (Sun., November 15, 2008): 3.

(Note: ellipses added.)




January 31, 2009

Car Bailout Destroys Dynamism of Process of Creative Destruction


(p. A29) Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction -- with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country's prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit's Big Three does not enhance creative destruction. It retards it. . . .

. . .

But the larger principle is over the nature of America's political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country's success.



For the full commentary, see:

DAVID BROOKS. "Bailout to Nowhere." The New York Times (Fri., November 18, 2008): A29.

(Note: ellipses added.)




January 15, 2009

Every Hour of Every Business Day "About 25,000 Jobs Are Destroyed and Created"


(p. A15) It's important to acknowledge that dynamic product markets create dynamic labor markets as well. In recent years, government statistics show that about 25,000 jobs are destroyed and created every hour that America is open for business. All this economic change is essential, but it presents very real challenges to workers.


For the full commentary, see:

MARTIN NEIL BAILY and MATTHEW J. SLAUGHTER. "What's Behind the Recent Productivity Slowdown." The Wall Street Journal (Sat., DECEMBER 13, 2008): A15.




January 11, 2009

Gains in Productivity Due to "Bipartisan Removal of Regulations that Stifle Competition and Innovation"


In the Clinton administration, Martin Neil Baily was the Chair of the Council of Economic Advisers. He is one of those Democratic economists, along with Brad DeLong and Larry Summers, who appreciates the importance of innovation through the process of creative destruction, in making our lives better.

(p. A15) The economic attention of U.S. government and business leaders is fixed squarely on the downturn and financial crisis. Whether or not bailouts are proper short-term medicine, economists agree that the long-run solution for restoring economic growth lies in raising productivity.

The single best measure of a country's average standard of living is productivity: the value of output of goods and services a country produces per worker. The more workers produce, the more income they receive, and the more they can consume. Higher productivity results in higher standards of living.

So how has U.S. productivity grown recently? Unfortunately, very slowly. After averaging 2.7% productivity growth from 1995 through 2002, annual growth of productivity in the nonfarming business sector has slowed dramatically -- to just 1.7% in 2005, 1.0% in 2006, and 1.4% in 2007. At this new average rate of under 1.4%, it would take nearly 52 years for average U.S. living standards to double -- versus just 26 years at the earlier average. Signs of this slowdown are apparent, particularly in the waning competitiveness of U.S. sectors like automobiles, financial services and information technology.

On Monday, we are issuing a new report that details a set of policies the government could implement to boost U.S. productivity growth. Time is of the essence in addressing this challenge because the economy-wide impacts of structural policies tend to appear only gradually, in part because of many-year corporate planning horizons. It is also because faster productivity growth will ease the burden of massive U.S. fiscal deficits now projected for the coming years.

A central theme of this report is the critical role that competitive product markets play in spurring productivity growth and boosting standards of living. One of the great U.S. policy successes of recent decades has been the bipartisan removal of regulations that stifle competition and innovation in product markets. U.S. industries that face strong competitive intensity are more productive than highly regulated or otherwise sheltered industries. This competition, in turn, yields higher incomes and greater choices for consumers.

Maintaining the productivity benefits of product market competition requires sound choices in areas including trade and investment, regulation and infrastructure.



For the full commentary, see:

MARTIN NEIL BAILY and MATTHEW J. SLAUGHTER. "What's Behind the Recent Productivity Slowdown." The Wall Street Journal (Sat., DECEMBER 13, 2008): A15.




January 10, 2009

Good Jobs and Bad Jobs


MathLumberjackCartoon.jpg










Source of cartoon: online version of the WSJ article quoted and cited below.


Labor is usually viewed as a victim of the process of creative destruction, because some old jobs are destroyed when a new technology replaces an old one. But part of the process is the creation of new jobs, and on average, the new jobs are created have better characteristics than the old jobs that are destroyed.

The article quoted below, discusses some of the characteristics that make a job better or worse.

(p. D2) Nineteen years ago, Jennifer Courter set out on a career path that has since provided her with a steady stream of lucrative, low-stress jobs. Now, her occupation -- mathematician -- has landed at the top spot on a new study ranking the best and worst jobs in the U.S.

"It's a lot more than just some boring subject that everybody has to take in school," says Ms. Courter, a research mathematician at mental images Inc., a maker of 3D-visualization software in San Francisco. "It's the science of problem-solving."

The study, released Tuesday from CareerCast.com, a new job site, evaluates 200 professions to determine the best and worst according to five criteria inherent to every job: environment, income, employment outlook, physical demands and stress. (CareerCast.com is published by Adicio Inc., in which Wall Street Journal owner News Corp. holds a minority stake.)

The findings were compiled by Les Krantz, author of "Jobs Rated Almanac," and are based on data from the U.S. Bureau of Labor Statistics and the Census Bureau, as well as studies from trade associations and Mr. Krantz's own expertise.

According to the study, mathematicians fared best in part because they typically work in favorable conditions -- indoors and in places free of toxic fumes or noise -- unlike those toward the bottom of the list like sewage-plant operator, painter and bricklayer. They also aren't expected to do any heavy lifting, crawling or crouching -- attributes associated with occupations such as firefighter, auto mechanic and plumber.



For the full story, see:

SARAH E. NEEDLEMAN. "Doing the Math to Find the Good Jobs; Mathematicians Land Top Spot in New Ranking of Best and Worst Occupations in the U.S." The Wall Street Journal (Tues., Jan. 6, 2008): D2.

For the ranking of 200 jobs, and the components that went into the ranking, see:

http://www.careercast.com/jobs/content/JobsRated_Top200Jobs





December 30, 2008

Supporters of Whaling Industry Objected to Light from Gas


In the process of creative destruction, the industry that is being destroyed often seeks to protect itself from the new innovation:

(p. 45) In England, objectors to gaslight argued that it undercut the whaling industry.


Source:

Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible - and Other Journeys. Boston: Back Bay Books, 1997.




December 26, 2008

Eastman Was a Self-Financed Entrepreneur


Mark Casson has argued that the more original the entrepreneur's innovation, the more likely he will need to finance all, or a large part, of it himself. To the extent that this is true, it represents an important argument for allowing the accumulation of wealth (and thereby an argument against substantial personal income, and inheritance, taxes.)

Here is an example, consistent with Casson's argument, of a self-financed entrepreneur:

(p. 36) The idea of loading film into a camera, snapping the picture and then sending the film to a store to be processed was the brainchild of an American from Rochester, New York, called George Eastman. One day in 1879, at the bank where he had worked since leaving school at the age of fourteen, he didn't get the promotion he was expecting. So he left and used his savings to set himself up as a "Maker and Dealer in Photographic Supplies." At this time, picture taking was a messy, cumbersome and expensive business, involving glass-late negatives, buckets of chemicals an monster wooden cameras. When Eastman had finished his experiments with the process, his slogan promised, "You press the button. We do the rest."


Source:

Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible - and Other Journeys. Boston: Back Bay Books, 1997.




December 18, 2008

Deaths in 'Natural' Disasters Caused by Absence of Economic Growth


We are often made to feel guilty for the suffering of other countries in "natural" disasters. But the deaths are more due to the lack of infrastructure, sound buildings and the like, which in turn are due to the countries' lack of economic growth, which in turn is due to their rejection of the process of capitalist creative destruction.

(p. 90) The simple truth is that money matters more than anything else in most disasters. Which is another way of saying that where and how we live matters more than Mother Nature. Developed nations experience just as many natural disasters as undeveloped nations. The difference is in the death toll. Of all the people who dies from natural disasters on the planet from 1985 to 1999, 65 percent came from nations with incomes below $760 per capita, according to the Intergovernmental Panel on Climate Change. The 1994 Northridge earthquake in California, for example, was similar in magnitude and depth to the 2005 earthquake in Pakistan. But the Northridge earthquake killed only sixty-three people. The Pakistan earthquake killed about a hundred thousand.

People need roofs, roads, and health care before quibbles like personality and risk perception count for much. And the effect is geometric. If a large nation raises its GNP from $2,000 to $14,000 per person, it can expect to save 530 lives a a year in natural disasters, according to a study by Matthew Kahn at Tufts University. And for those who survive, money is a form of liquid resilience: it can bring treatment, stability, and recovery.



Source:

Ripley, Amanda. The Unthinkable: Who Survives When Disaster Strikes - and Why. New York: Crown Publishers, 2008.




December 9, 2008

I Was Wrong: Apparently the U.S. Auto Industry Does Have a Prayer


PrayingAutoIndustryMiracle.jpg"PRAYING FOR A MIRACLE.   S.U.V.'s sat on the altar of Greater Grace Temple, a Pentecostal church in Detroit, as congregants prayed to save the auto industry." Source of the caption and photo: online version of the NYT article quoted and cited below.

The process of creative destruction, requires that failed businesses be allowed to fail, so that the resources (labor and capital) devoted to the failed businesses, can be devoted to more productive uses.

The Danny DeVito character in "Other People's Money" makes this point in a speech near the end, in which he says that the Gregory Peck character has just delivered a "prayer for the dead" in calling for continued support for a dead business that is technologically obsolete.

On a more personal level, we have always bought cars from Honda and Toyota, because we sincerely believe that they build better cars than Detroit does. By what right does the government force taxpayers to prop up companies whose products have been rejected in the marketplace?

When the economic and moral arguments for bailout fail, all that is left for a failed industry is prayer (and politics)---one more reason to believe that the opportunity cost of prayer, is high.

(p. A19) DETROIT -- The Sunday service at Greater Grace Temple began with the Clark Sisters song "I'm Looking for a Miracle" and included a reading of this verse from the Book of Romans: "I consider that our present sufferings are not worth comparing with the glory that will be revealed in us."

Pentecostal Bishop Charles H. Ellis III, who shared the sanctuary's wide altar with three gleaming sport utility vehicles, closed his sermon by leading the choir and congregants in a boisterous rendition of the gospel singer Myrna Summers's "We're Gonna Make It" as hundreds of worshipers who work in the automotive industry -- union assemblers, executives, car salesmen -- gathered six deep around the altar to have their foreheads anointed with consecrated oil.

While Congress debated aid to the foundering Detroit automakers Sunday, many here whose future hinges on the decision turned to prayer.

Outside the Corpus Christi Catholic Church, a sign beckoned passers-by inside to hear about "God's bailout plan."



For the full story, see:

NICK BUNKLEY. "Detroit Churches Pray for 'God's Bailout'." The New York Times (Mon., December 8, 2008): A19.

(Note: The photo of the top appeared on p. A1 of the print edition of the December 8, 2008 NYT; also, the online version of the article has a date of Dec. 7 instead of the Dec. 8 date of the print version.)

PrayingAutoIndustryMiracle2.jpg"Worshipers at Greater Grace Temple, a Pentecostal church in Detroit, prayed on Sunday for an automobile industry miracle." Source of the caption and photo: online version of the NYT article quoted and cited above.




December 6, 2008

Reason for Success of U.S. Economy: "We Let People Fail"


McCain's chief economic adviser and entrepreneur-expert Hotz-Eakin offered some cogent comments on the trend toward more government bailouts at the taxpayers' expense:

(p. A6) Mr. Obama is by no means an activist in the Japanese mold, said Douglas Holtz-Eakin, an economic adviser to John McCain's presidential campaign. But as a whole, policies crafted to address distinct problems in the auto, energy and banking sectors are merging into a broader policy that would pick some winners and losers, preserve entire industries and shape consumer choices.

"We're backing into industrial policy in an emergency to correct massive market failures," said Jared Bernstein, an economist at the liberal Economic Policy Institute who has worked with the president-elect's economic team.

. . .

"The reason the U.S. economy was so successful for so long was not because we did things so well. It was because we let people fail." Mr. Hotz-Eakin said. "This is dangerous at some very deep level."



For the full story, see:

JONATHAN WEISMAN. "Wider U.S. Interventions Would Yield Winners, Losers as Industries Realign." The Wall Street Journal (Thurs., NOVEMBER 20, 2008): A6.

(Note: ellipsis added.)

(Note: the final paragraph was in the print edition, but was deleted from the online version.)




December 4, 2008

The Benefits from the Discovery of Sulfa, the First Antibiotic


I quoted a review of The Demon Under the Microscope in an entry from October 12, 2006. I finally managed to read the book, last month.

I don't always agree with Hager's interpretation of events, and his policy advice, but he writes well, and he has much to say of interest about how the first anti-bacterial antibiotic, sulfa, was developed.

In the coming weeks, I'll be highlighting a few key passages of special interest. In today's entry, below, Hager nicely summarizes the importance of the discovery of antibiotics for his (and my) baby boom generation.

(p. 3) I am part of that great demographic bulge, the World War II "Baby Boom" generation, which was the first in history to benefit from birth from the discovery of antibiotics. The impact of this discovery is difficult to overstate. If my parents came down with an ear infection as babies, they were treated with bed rest, painkillers, and sympathy. If I came down with an ear infection as a baby, I got antibiotics. If a cold turned into bronchitis, my parents got more bed rest and anxious vigilance; I got antibiotics. People in my parents' generation, as children, could and all too often did die from strep throats, infected cuts, scarlet fever, meningitis, pneumonia, or any number of infectious diseases. I and my classmates survived because of antibiotics. My parents as children, and their parents before them, lost friends and relatives, often at very early ages, to bacterial epidemics that swept through American cities every fall and winter, killing tens of thousands. The suddenness and inevitability of these epidemic deaths, facts of life before the 1930s, were for me historical curiosities, artifacts of another age. Antibiotics virtually eliminated them. In many cases, much-feared diseases of my grandparents' day---erysipelas, childbed fever, cellulitis---had become so rare they were nearly extinct. I never heard the names.


Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.




November 28, 2008

Companies "Once as Strong as Dinosaurs But Now Just as Extinct"


From McCraw's discussion of Schumpeter's legacy:

(p. 496) No country, regardless of how long it has been prosperous, can take permanent affluence for granted. Nor can any company assume its continued existence---as names such as Digital Equipment, Pan American Airways, Pullman, Douglas Aircraft, and the Pennsylvania Railroad remind us. Each of these companies once epitomized the cutting edge not only of its own industry but of American business as a whole. And all are now in the dustbin of history, along with hundreds of thousands of other businesses of all sizes---once as strong as dinosaurs but now just as extinct.


Source:

McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.




November 27, 2008

Microsoft Still Risks Becoming "Road Kill on the Information Highway"


BallmerSteveNewEra.jpg



"Steve Ballmer is the second Microsoft chief executive to butt his head against the view that a new era in technology brings a new market leader." Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 4) The Yahoo affair obscures the larger story: Microsoft's long, long struggle -- since 1993 -- to maintain its leadership position while the Internet grew ubiquitous. Mr. Ballmer, who joined Microsoft in 1980 as its 15th employee, and Bill Gates, his mentor who will retire next month as a full-time Microsoft employee, have certainly tried their best to avert the inevitable decline of the company's influence.

In 2000, Mr. Ballmer credited Mr. Gates for noting that no company in the computer business had ever stayed on top through what Mr. Gates called "a major paradigm shift." The two men wanted Microsoft to be the first company to achieve that goal. An interesting challenge, but some problems are of a size that dwarf the abilities of multibillionaire mortals.

In a 1995 internal memo, "The Internet Tidal Wave," Mr. Gates alerted company employees to the Internet's potential to be a disruptive force. This was two years before Clayton M. Christensen, the Harvard Business School professor, published "The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail" (1997). The professor presented what would become a widely noted framework to explain how seemingly well-managed companies could do most everything to prepare for the arrival of disruptive new technology but still lose market leadership.

It's Google, of course, that has developed the musculature to step forward and lay claim to being Microsoft's successor as industry leader in the Internet era. If there had been any way Microsoft could have prepared for this day, it had ample time to do so. In 1993, fully five years before Google's founding and two years before Mr. Gates's memo, Nathan P. Myhrvold, then Microsoft's chief technology officer, wrote his own memo, "Road Kill on the Information Highway." It spelled out in prescient detail how each of many industries would be flattened by the build-out of digital networks, and it said that the PC software business would be no exception.



For the full commentary, see:

RANDALL STROSS. "Digital Domain; The Computer Industry Comes With Built-In Term Limits." The New York Times, SundayBusiness Section (Sun., May 18, 2008): 4.




November 22, 2008

"Three Generations from Overalls to Overalls"


(p. 156) Because it proceeds by competitively destroying old businesses and hence the existences dependent upon them, there always corresponds to it a process of decline, of loss of caste, of elimination. This fate also threatens the entrepreneur whose powers are declining, or his heirs who have inherited his wealth without his ability. This is not only because all individual profits dry up, the competitive mechanism tolerating no permanent surplus values, but rather annihilating them by means of just this stimulus of the striving for profits which is the mechanism's driving force; but also because in the normal case things so happen that entrepreneurial success embodies itself in the ownership of a business; and this business is usually carried on further by the heirs on what soon become traditional lines until new entrepreneurs supplant it. An American adage expresses it: three generations from overalls to overalls. And so it may be. Exceptions are rare, and are more than compensated for by cases in which the descent is still faster. Because there are always entrepreneurs and relatives and heirs of entrepreneurs, public opinion and also the phraseology of the social struggle readily overlook these facts. They constitute "the rich" a class of inheritors who are removed from life's battle. In fact, the upper strata of society are like hotels which are indeed always full of people, but people who are forever changing.


Source:

Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Translated by Redvers Opie. translation of 2nd German edition that appeared in 1926; translation first published by Harvard in 1934 ed. London: Oxford University Press, 1961.




November 19, 2008

Company Graveyard Scene from Wattenberg's "In Search of the Real America"


EdselTombstone.JPG Source of image: screen capture downloaded on 9/3/08 from: http://cgi.ebay.com/PBS-TV-SERIES-IN-SEARCH-OF-THE-REAL-AMERICA-1977_W0QQitemZ330267803398QQihZ014QQcategoryZ63821QQssPageNameZWDVWQQrdZ1QQcmdZViewItem

For years I have been trying to find a copy of Ben Wattenberg's wonderful opening scene in the episode on big business of his 1970s series "In Search of the Real America." He stands in a spooky, foggy, graveyard next to several tombstones. When we see the tombstones more closely, they have the names of big business corporate failures.

InSearchOfTheRealAmericaOpeningSlide.JPG Source of image: screen capture downloaded on 9/3/08 from: http://cgi.ebay.com/PBS-TV-SERIES-IN-SEARCH-OF-THE-REAL-AMERICA-1977_W0QQitemZ330267803398QQihZ014QQcategoryZ63821QQssPageNameZWDVWQQrdZ1QQcmdZViewItem




October 24, 2008

L.E.D.'s as the Next Leapfrog Advance in Light



A few years ago I presented a paper at the meetings of Society for Social Studies of Science in which I mentioned Nordhaus's wonderful paper in which he measures advances in technology that produce illumination. Some of the technologies represent leapfrog advances that are part of Schumpeter's process of creative destruction.

At the end of my presentation, a member of the audience gave me a reference to the new L.E.D. light technology that he suggested was the next leapfrog advance. (Alas, I do not remember his name.)


(p. C3) L.E.D. bulbs, with their brighter light and longer life, have already replaced standard bulbs in many of the nation's traffic lights. Indeed, the red, green and yellow signals are -- aside from the tiny blinking red light on a DVD player, a cellphone or another electronic device -- probably the most familiar application of the technology.

But it is showing up in more prominent spots. The ball that descends in Times Square on New Year's Eve is illuminated with L.E.D.'s. And the managers of the Empire State Building are considering a proposal to light it with L.E.D. fixtures, which would allow them to remotely change the building's colors to one of millions of variations.

. . .

The problem, though, is the price. A standard 60-watt incandescent usually costs less than $1. An equivalent compact fluorescent is about $2. But in Europe this September, Philips, the Dutch company dealing in consumer electronics, health care machines and lighting, is to introduce the Ledino, its first L.E.D. replacement for a standard incandescent. Priced at $107 a bulb, it is unlikely to have more than a few takers.

"L.E.D. performance is there, but the price is not," said Kevin Dowling, a Philips Lighting vice president . . .

. . .

"The Marcus Center lighting will require no maintenance for 15 years," Mr. Gregory said. "That's a dream for a lighting designer."

But he does not expect standard bulbs to disappear totally. Just as the invention of the light bulb did not completely kill the candle and kerosene lamp markets, Mr. Gregory said, "there will always be a need for incandescent bulbs. They will never totally go away."

"The way an incandescent bulb plays on the face on a Broadway makeup mirror," he said, "you can never duplicate that."



For the full story, see:

ERIC A. TAUB. "Fans of L.E.D.'s Say This Bulb's Time Has Come." The New York Times (Mon., July 28, 2008): C3.

(Note: ellipses added.)


The reference to the Nordhaus paper is:

Nordhaus, William D. "Do Real-Output and Real-Wage Measures Capture Reality? The History of Light Suggests Not." In The Economics of New Goods, edited by Robert J. Gordon and Timothy F. Bresnahan, Chicago: University of Chicago Press for National Bureau of Economic Research, 1997, pp. 29-66.


LEDsNewYearsBallFullSpectrum.jpg "The full spectrum of color, design and programming available for the Times Square ball." Source of the caption and photo: online version of the NYT article quoted and cited above.





October 12, 2008

Leapfrog Competition Among Three Firms in Jet-Engine Oligopoly


GearedTurboFanEnginePrattWhitney.jpg "Pratt & Whitney hopes its Geared Turbo Fan engine will defy skeptics and win it a spot on the next generation of jets from Boeing and Airbus." Source of the caption and photo: online version of the WSJ article quoted and cited below.

(p. B1) Once every 20 years or so, the companies that make jet engines battle it out for a chance to power the next generation of single-aisle airplanes.

. . .

General Electric Co. unveiled plans to develop a new family of engine cores that it said would vault it ahead of United Technologies Corp.'s Pratt & Whitney, which has a two-year head start on a novel engine that promises to burn 12% less fuel than today's best engines.

GE, which is working with French partner Safran SA, said its engine will have fewer moving parts than Pratt & Whitney's, and will deliver equal or better performance. "We've been pretty quiet for the last couple of years, but we've been doing plenty of work in secret," said GE Aviation President David Joyce, in an interview. "So be it. Game on."

. . .

Besides GE and Pratt & Whitney, the other major player in the industry is Britain's Rolls-Royce PLC. Hoping to dominate the market, all three companies plan to spend well over $1 billion on their new engines, stretching the limits of their technology. Developing fuel-efficient engines requires the use of exotic alloys and ceramic coatings that can cope with internal engine temperatures that would be above the melting points of untreated metal components.

The next generation of engines may look radically different from those used today. One design that GE and Rolls-Royce are exploring separately would have a double row of propellers at the (p. B3) back end of the engine, with no protective covering. Such an engine would be noisier and significantly slower than today's planes. It also would have to be mounted at the rear of the airplane, but the companies say it would consume as much as 24% less fuel.

. . .

Pratt & Whitney had hoped to get a boost in the engine race by promoting a design called the Geared Turbo Fan. It uses a gearbox at the front of the engine that allow various fans and compressors to turn at different speeds for greater efficiency and less noise. . . .

. . .

The company has been working on the gear technology for almost 20 years, investing almost $1 billion so far, Mr. Finger said. He said that in addition to fuel and emissions savings, the new engine will cut noise by a factor of two and reduce maintenance by 40% because it will have fewer moving parts throughout the engine.



For the full story, see:

J. LYNN LUNSFORD and DANIEL MICHAELS. "Jet-Engine Makers Launch New War; Billions of Dollars at Stake in Race To Develop Efficient Power Source For Next Wave of Boeing, Airbus Planes." The Wall Street Journal (Mon., July 14, 2008): B1 & B3.

(Note: ellipses added.)


GearedTurboFanEnginePrattWhitneyDiagram.jpg "GE is creating an engine with fewer moving parts than Pratt & Whitney's design, and seeks to deliver equal or better performance." Source of the caption and photo: online version of the WSJ article quoted and cited above.




October 10, 2008

For Some Purposes Leapfrogged Technologies Remain Better



CassetteRIPtombstone.jpg "Hachette's audio department recently held a "funeral" for cassette tapes; an invitation is above." Source of caption and photo: online version of the NYT article quoted and cited below.


The article quoted below mentions a feature of new "leapfrog" technologies that has received too little attention. The new product, overall, for most purposes, or for most important purposes, is better than the old product, but it may be that the new product lacks some features that the old product had, that had value. It is a step forward in most respects, but not in all respects.

I salute the observation in the last quoted paragraph below. When I am listening to a book, while walking Willy, some UPS truck often passes me, noisily making a sentence of two inaudible. If I'm listening to a cassette, I can back up a few sentences. If I'm listening to a CD, I have to back up at least a few minutes, and often many minutes (depending on how short the tracks are on the CD).

I remember an early word processor (can't remember its name, maybe it was Wordmarc), that allowed you to type in the page number of a long document and then go directly to that page. I am currently writing a book using Microsoft Word. And in the vast majority of respects it is better than the word processor of yore. But every time I have to scroll and scroll and scroll, to get to a page, when I already know exactly which page I want, I irrationally curse Bill Gates.

Addendum posted 10/10/08:

Since this post was created on July 30, 2008, I have discovered that Word 2007 has the feature that I missed from Wordmarc, and I also learned that if I had invested more time in Word 2003, I might have discovered that by drilling down to an obscure option menu, it too could have been customized to have had the feature. (In Wordmarc the feature was real obvious.)


(p. C7) There was a funeral the other day in the Midtown offices of Hachette, the book publisher, to mourn the passing of what it called a "dear friend." Nobody had actually died, except for a piece of technology, the cassette tape.

While the cassette was dumped long ago by the music industry, it has lived on among publishers of audio books. Many people prefer cassettes because they make it easy to pick up in the same place where the listener left off, or to rewind in case a certain sentence is missed. For Hachette, however, demand had slowed so much that it released its last book on cassette in June, with "Sail," a novel by James Patterson and Howard Roughan.

The funeral at Hachette -- an office party in the audio-book department -- mirrored the broader demise of cassettes, which gave vinyl a run for its money before being eclipsed by the compact disc. (The CD, too, is in rapid decline, thanks to Internet music stores, but that is a different story.)

. . .

Cassette tapes' tendency to hiss -- and to melt in the summer and snap in the winter -- turns off audiophiles. But for audio books, the cassette is an oddly elegant medium: you can eject it from your car, carry it home and stick it in a boombox, and it will pick up in the same place, an analog feat beyond the ability of the CD.



For the full story, see:

ANDREW ADAM NEWMAN. "Say So Long to an Old Companion: Cassette Tapes." The New York Times (Mon., July 28, 2008): C7.

(Note: ellipsis added.)






September 9, 2008

McCraw Identifies Schumpeter's "Signature Legacy"


McCraw is correct in identifying Schumpeter's "signature legacy":

(p. 495) Schumpeter's signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general.


Source:

McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

(Note: italics in original.)




September 2, 2008

Harvard Professor Doriot Used Venture Capital to Finance the Digital Equipment Corporation


CreativeCapitalBK.jpeg










Source of book image: http://creativecapital.wordpress.com/category/how-to-buy-creative-capital/

Doriot taught at Harvard during the whole time that Joseph Schumpeter taught at Harvard. Given that their interests apparently overlapped, it is surprising that there are no references to Schumpeter or to "creative destruction" in Ante's book.

There are also no references to Doriot in McCraw's recent comprehensive intellectual biography of Schumpeter.

(Scherer in his essay "An Accidental Schumpeterian" mentions taking a useful course from Doriot, but does not illuminate the relationship, if any, between Doriot and Schumpeter.)

(p. A17) Before Sand Hill Road near Stanford University became the center of the venture-capital universe - before Google and Pets.com - the modern market for financing risky startup companies took shape far from Silicon Valley in the years after World War II.

ARD was the first to raise what was then known as "risk capital" from outsiders at a time when investors' wounds were still fresh from the stock-market crash of 1929 and the Depression of the 1930s. The high failure rate of start-ups had generally precluded raising money from average investors. And so ARD's chief competitors in the postwar years were the Rockefellers and another old-money operation, J.H. Whitney & Co.

. . .

The company would hardly merit attention except for its one grand slam, Digital Equipment Corp., which helped establish the East Coast high-tech stronghold along Route 128 outside Boston.

Digital, a minicomputer maker co-founded by former Massachusetts Institute of Technology engineer Ken Olsen, received $70,000 from ARD in 1957 in return for a 70% stake, which eventually grew in value to hundreds of millions of dollars. Mr. Ante calculates the investment's return at 70,000%.

. . .

Doriot, who taught at Harvard for 40 years, beginning in 1926, offered a popular class that was ostensibly about manufacturing but was more a seminar in his business philosophy. "He stressed common sense themes such as self-improvement, teamwork, and contributing to society," Mr. Ante writes. Doriot was known for "spicing up his philosophy with practical and pithy words of advice." Among them: "Always remember that someone somewhere is making a product that will make your product obsolete."



For the full review, see:

RANDALL SMITH. "Bookshelf; Money to Make Things New." The Wall Street Journal (Weds., May 21, 2008): A17.

(Note: ellipses added.)


Reference to the biography of Doriot:

Ante, Spencer E. Creative Capital: Georges Doriot and the Birth of Venture Capital. Boston: Harvard Business School Press, 2008.




August 11, 2008

Soros Warns Against Too Much Creative Destruction


SorosCryingWolf.jpg





Investor George Soros as the boy who cried "wolf" one time too often. Source of Soros caricature: online version of the WSJ article quoted and cited below.

I have mixed feelings about George Soros. He likes Karl Popper, and I like Karl Popper. He donated a bunch of money to help worthy scholars in Eastern Europe, and financed a conference in Romania on private philanthropy, at which I gave a presentation.

On the other hand, he has also given a bunch of money to politicians who oppose economic freedom. And I think the high level of government regulation he favors would greatly reduce innovation.

(p. B2) WSJ: Are you getting recognition from heavyweights in academia or policy making?

Mr. Soros: It has certainly not penetrated academia, and not policy makers either. There was an article in The Wall Street Journal about people doing research on bubbles at Princeton, so I'm going to meet with one of them. I wish I could engage in a discussion with [the Federal Reserve]. I'm waiting for a phone call. I'm [meeting with] Alan Greenspan.

WSJ: But you are quite critical of Greenspan.

Mr. Soros: Greenspan is one of the great manipulators of financial markets. I mean it in a good way. He managed [in 2001] to forestall a more serious recession. He kept interest rates [low] too long. And he did not heed the warnings that lending standards were being lowered, that deceptive practices were being used. He was too much of a market fundamentalist. He believed that if you leave it to markets, everything will be all right. That's initially self-reinforcing, but eventually self-defeating.

WSJ: Greenspan argues that the benefits of innovation are worth the occasional bubble.

Mr. Soros: This is, of course, [Joseph] Schumpeter's creative destruction idea. However ... going overboard in generating change is not necessarily a good thing. Financial innovation may not be an unmixed blessing because it really prevents proper regulation.

If you look at the 19th century, you had creative destruction going on, one financial crisis after another. But each time you had a crisis, you had an examination of what went wrong, and you put in some instrument or some institution to prevent it from happening.

I'm not advocating ... central planning because that's worse than markets. But the regulators need to learn from the mistakes that they have made. I think it's pretty clear that you've got to accept responsibility for moderating asset bubbles. ... That involves regulating credit as well as [interest rates].



For the full story, see:

GREG IP. "Soros, the Man Who Cries Wolf, Now Is Warning of a 'Superbubble'." The Wall Street Journal (Sat., June 21, 2008): B1-B2.

(Note: brackets and ellipses in original.)

(Note: I am grateful to Jamie McDonald for calling this article to my attention.)




August 8, 2008

McCain "Shows a Lack of Understanding of the Insights of Joseph Schumpeter"


I agree with the Karl Rove's analysis below, that John McCain does not exhibit much understanding of Schumpeter's process of creative destruction. On the other hand, I have seen no evidence that Barack Obama has any such understanding either. (Nor have I seen any evidence that Rove's former boss, George W. Bush, has any such understanding, for that matter.)

And, in general, I am still of the belief that, overall, between the two of them, McCain will put fewer obstacles in the path of innovation than will Obama.

(p. A13) This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."

But oil and gas companies report that they have invested heavily in alternative energy. Out of the $46 billion spent researching alternative energy in North America from 2000 to 2005, $12 billion came from oil and gas companies, making the industry one of the nation's largest backers of wind and solar power, biofuels, lithium-ion batteries and fuel-cell technology.

Such investments, however, are not as important as money spent on technologies that help find and extract more oil. Because oil companies invested in innovation and technology, they are now tapping reserves that were formerly thought to be unrecoverable. Maybe we are all better off when oil companies invest in what they know, not what they don't.

And do we really want the government deciding how profits should be invested? If so, should Microsoft be forced to invest in Linux-based software or McDonald's in weight-loss research?

Mr. McCain's angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a "perennial gale of creative destruction" is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is "the pivot on which everything turns," Schumpeter argued, and "proceeds by competitively destroying old businesses."

Most dramatic change comes from new businesses, not old ones. Buggy whip makers did not create the auto industry. Railroads didn't create the airplane. Even when established industries help create new ones, old-line firms are often not as nimble as new ones. IBM helped give rise to personal computers, but didn't see the importance of software and ceded that part of the business to young upstarts who founded Microsoft.

So why should Mr. McCain expect oil and gas companies to lead the way in developing alternative energy? As with past technological change, new enterprises will likely be the drivers of alternative energy innovation.



For the full story, see:

KARL ROVE. "Obama and McCain Spout Economic Nonsense." The Wall Street Journal (Thurs., June 19, 2008): A13.

(Note: I thank John Pagin and Dagny Diamond for alerting me to Rove's discussion of Schumpeter.)




August 7, 2008

Ordinary People Have Prospered in Recent Decades


CareyDrewLivingLarge.jpg




Source of image: http://mjperry.blogspot.com/2008/02/blog-post_2174.html



Stephen Moore is right when he calls Drew Carey's "Living Large" video "wonderful."

It would be even more wonderful, if it gave a bit more emphasis, a la Schumpeter, to the positive effects of new products, in addition to its emphasis on declining prices of already existing products.

(p. W11) A few weeks ago I gave a talk on the state of the economy to a group of college students -- almost all Barack Obama enthusiasts -- who were griping about how downright awful things are in America today. As they sipped their Starbucks lattes and adjusted their designer sunglasses, they recited their grievances: The country is awash in debt "that we will have to pay off"; the middle class in shrinking; the polar ice caps are melting; and college is too expensive.

I've been speaking to groups like this one for more than 20 years, but I have never confronted such universal pessimism from a young audience. Its members acted as if the hardships of modern life are making it nearly impossible for them to get out of bed in the morning. So I conducted a survey of these grim youngsters. How many of you, I asked, own a laptop? A cellphone? An iPod, a DVD player, a flat-screen digital TV? To every question somewhere between two-thirds and all of the hands in the room rose. But they didn't even get my point. "Well, duh," one of them scoffed, "who doesn't have an iPod these days?" I was way too embarrassed to tell them that I, for one, don't. They thought that living without these products would be like going back to prehistoric times.

They seemed clueless that as recently as the early 1980s only the richest people in the world had cellphones and the quality of these products left much to be desired. Watch a movie from 20 years ago and you will laugh out loud seeing big clunky black machines that weighed as much as a brick, gave crackly service and cost $4,200. Now cellphones are practically free -- even disposable. And the cost of making calls has dropped dramatically too.

. . .

There's a wonderful new video on Reason.tv called "Living Large." In it, comedian Drew Carey goes to a lake in California where people are relaxing on $80,000 27-foot boats and goofing around on $25,000 jet skis that they have hitched to their $40,000 SUVs. Mr. Carey asks these boat owners what they do for a living. As it turns out, they aren't hedge-fund managers. One is a gardener, another a truck driver, another an auto mechanic and another a cop.

. . .

After my lecture, one young woman walked up to me on her way out and huffed: "What I favor is a radical redistribution of wealth in America." I tried to tell her that America's greatness is a result of our focus on creating wealth, not redistributing it. But it was too late -- she was already tuning in to her iPod.



For the full commentary, see:

STEPHEN MOORE. "DE GUSTIBUS; The Bare Necessities: A Generation Tries to Imagine Life Without iPods." The Wall Street Journal (Fri., March 14, 2008): W11.

(Note: ellipses added.)


The video is:

Carey, Drew. "Living Large: The Middle Class." reason.tv Posted February 8, 2008.




July 28, 2008

McCraw on Schumpeter


  Source of book image: http://reader2.com/wasp1028

I am in the process of writing a full-length review of McCraw's book for the annual Research in the History of Economic Thought and Methodology. Suffice it to say that McCraw's book is very useful and very interesting, and gets a lot right that is important. Most notably, McCraw appreciates that Schumpeter's central message is that innovation is what matters most about capitalism.

Source of book:

McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.




July 14, 2008

"Innovation Has Helped Lift Untold Numbers Out of Poverty"


ProductivityRevolutionGraphic.gif Source of graph: online version of the WSJ article quoted and cited below.

(p. A23) . . . the impact of our technological innovation has helped lift untold numbers out of poverty.

This technology has created massive amounts of change. Like the Industrial Revolution before it, the current transformation is anything but pain-free. It's what Joseph Schumpeter called creative destruction. Google, Craigslist and Microsoft have been prospering. General Motors, United Airlines and the New York Times have not. In the midst of layoffs in the newsroom, it's hard to see anything good happening in the rest of the economy.



For the full commentary, see

BRIAN WESBURY. "Change We Can Believe In Is All Around Us." The Wall Street Journal (Weds., June 11, 2008): A23.

(Note: ellipsis added.)




June 5, 2008

Factory Work Was Better than the "Abysmal" Alternatives


Levy and Murnane show that the computer has, on average, benefitted the situation of labor. After I presented a similar example at the Summer Institute in 2007, Dave Mitch asked me if this was in general true of advances in technology, or if it might be an exceptional case.

If computers represent one example of creative destruction, another example, in the process variety, would be the advent of factory production. In the following passage, Rosenberg and Birdzell suggest that factories also benefitted the situation of labor:

The low wages, long hours, and oppressive discipline of the early factories are shocking in that the willingness of the inarticulate poor to work on such terms bespeaks, more forcefully than the most eloquent words, the even more abysmal character of the alternatives they had endured in the past. But this was not the way the romantics of the nineteenth century read the message of the factories. (R & B 1986, p. 173)

In the above passage, Rosenberg and Birdzell suggest that the abysmal alternatives to factory work, that the poor faced, may partly have been the result of the enclosure movement having worsened the situation of the lowest agricultural workers, by denying them access to the fallow lands for animal grazing. But, in the passage below, they also imply that to some extent it may just have been due to the secularly persistent suffering that had long characterized much rural life.

Neither the entrepreneurs who built the factories nor anyone else supposed that they were engaged in a work of charity or an exercise of social conscience. But whatever the moral quality of their intentions, their actions advanced the interests of a down-trodden subproletariat---a subproletariat in part, perhaps, characteristic of pre-industrial societies and, in part, drawn from an agricultural work force hard pressed by the enclosure movement and a high rate of growth in agricultural productivity. (R & B 1986, p. 174)

They further point out that, although everyone was supposed to be compensated for losses from enclosure, the interests of the poorest were not well-represented in the decision-making bodies:

In theory, the acts compensated the cottagers for the loss of their common rights by giving them some of the enclosed land. But the cottagers were not effectively represented in Parliament, and there is much reason to believe that the compensation was in practice inadequate. (R & B 1986, p. 171)

DeLong and Summers note enclosure as one of the major institutional/policy actions that enabled a past episode of creative destruction to create a past 'new economy.' But the fact (if it is a fact) that a majority of farm labor was hurt by the enclosure, does not imply that this had to have been the case. It may in fact illustrate one of the major pints of DeLong and Summers, namely that it is extremely important to try to get institutions and policies right.


Sources mentioned above:

DeLong, J. Bradford, and Lawrence H. Summers. "The "New Economy": Background, Questions and Speculations." Federal Reserve Bank of Kansas City Economic Review (2001): 29-59.

Levy, Frank, and Richard J. Murnane. The New Division of Labor: How Computers Are Creating the Next Job Market. Princeton, NJ: Princeton University Press, 2004.

Rosenberg, Nathan, and L.E. Birdzell, Jr. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books, 1986.




May 26, 2008

"A Single Frame of a Movie"


(p. 144.) In all Western countries, the inventory of physical facilities for economic production changes. The inventory at any given moment is unquestionably important, but it is like a single frame of a movie; taken alone, it misses all the action, and it is the action that we need to understand and that holds the promise of economic advance to non-Western countries.

Source:

Rosenberg, Nathan, and L.E. Birdzell, Jr. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books, 1986.




May 25, 2008

How Corning Invests in Major Innovations


CorningNewTechnologies.gif









Source of graphic: online version of the WSJ article quoted and cited below.

(p. B1) Corning Inc. has survived for 157 years by betting big on new technologies, from ruby-colored railroad signals to fiber-optic cable to flat-panel TVs. And now the glass and ceramics manufacturer is making its biggest research bet ever.

Under pressure to find its next hit, the company has spent half a billion dollars -- its biggest wager yet -- that tougher regulations in the U.S., Europe and Japan will boost demand for its emissions filters for diesel cars and trucks.

. . .

An investment 25 years ago has turned Corning into the world's largest maker of liquid-crystal-display glass used in flat-panel TVs and computers. But another wager, which made it the biggest producer of optical fiber during the 1990s, almost sank the company when the tech boom turned into a bust.

In Erwin, a few miles from the company's headquarters in Corning, the glassmaker is spending $300 million to ex-(p. B2)pand research labs. There, some 1,700 scientists work on hundreds of speculative projects, from next-generation lasers to optical sensors that could speed the discovery of drugs.

"Culturally, they're not afraid to invest and lose money for many years," says UBS analyst Nikos Theodosopoulos. "That style is not American any more."

Corning also goes against the grain in manufacturing. While it has joined the pack in moving most of its production overseas, it eschews outsourcing and continues to own and operate the 50 factories that churn out thousands of its different products.

Corning argues that retaining control of research and manufacturing is both a competitive advantage and a form of risk management. Its strategy is to keep an array of products in the pipeline and, once a market develops, to build factories to quickly produce in volumes that keep rivals from gaining traction.


For the full story, see:

SARA SILVER. "Corning's Biggest Bet Yet? Diesel-Filter Technologies." The Wall Street Journal (Fri., March 7, 2008): B1-B2.

(Note: ellipsis added.)

CorningDuraTrapFilter.jpg



"Corning DuraTrap diesel-engine filter." Source of caption and photo: online version of the WSJ article quoted and cited above.




May 19, 2008

"How the West Grew Rich" is an Elegant and Wonderful Book


HowTheWestGrewRickBK.jpg









Source of book image:
http://images.barnesandnoble.com/images/22600000/22606300.jpg


For many years I have wanted to carefully read Rosenberg and Birdzell's How the West Grew Rich. I am glad I have finally done it, and wish I had done it sooner. It is a tour de force of careful scholarly synthesis of a wide range of issues related to a fundamental question with many implications for policy.

The authors operate within a broadly Schumpeterian perspective, in that they see innovation as the key driver of human progress. One underlying theme is that societies that give more play to experimentation in institutions, are more likely to allow, encourage, and widely adopt, innovations.

Although written over two decades ago, the book only rarely seems dated. (The only instance I can think of is the occasional attention that the authors give to Marxist claims, that are seldom taken as seriously now as they sometimes still were in 1986.)

The writing style is not easy to read, but is rewarding. They write with elegance, and subtlety, and dry wit.

The reference to the book:

Rosenberg, Nathan, and L.E. Birdzell, Jr. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books, 1986.




May 15, 2008

Schumpeterians Lead Ranking of Business Gurus


GuruGraphic.gif Source of graphic: online version of the WSJ article quoted and cited below.

The top two business gurus in the WSJ's latest ranking, have each written major books that make substantial use of Schumpeter's concept of creative destruction. (The Hamel book is Leading the Revolution, and the Thomas Friedman book is The Lexus and the Olive Tree.)

Others among the top 20 gurus who have written favorably of the process of creative destruction, include Clayton Christensen, Jack Welch, and Tom Peters.

(p. B1) The guru game is changing.

Psychologists, journalists and celebrity chief executives crowd the top of a ranking of influential business thinkers compiled for The Wall Street Journal. The results, based on Google hits, media mentions and academic citations, ranked author and consultant Gary Hamel No. 1.

But Dr. Hamel is the only traditional business guru in the top five, which includes two journalists, Thomas Friedman and Malcolm Gladwell, and a former CEO, Bill Gates. Mr. Gladwell is among three thinkers in the top eight who focus on psychology. His 2005 book "Blink: The Power of Thinking Without Thinking" examined the role of snap judgments in decision-making. Howard Gardner, a professor of education at Harvard best known for the theory of "multiple intelligences," is No. 5, while Daniel Goleman, a psychologist who has written about "emotional intelligence," ranks eighth.

Thomas H. Davenport, a management professor at Babson College, compiled the ranking, employing the same methodology he used in a 2003 book, "What's the Big Idea?" Several well-known business gurus fell lower in the updated list, including Michael Porter and Tom Peters, who topped the 2003 ranking and dropped to Nos. 14 and 18, respectively. Harvard's Prof. Porter noted that his last book was on health care rather than general management, and that "I feel like my recent work continues to have an impact in my various fields."

Dr. Davenport says the changes show that time-strapped managers are hungry for easily digestible advice wherever they can find it. Today, the most pressing themes include globalization, motivation and innovation. Traditional business gurus writing "weighty tomes" are in decline, he says.


For the full story, see:

ERIN WHITE. "New Breed of Business Gurus Rises; Psychologists, CEOs Climb in Influence, Draw Hits, Big Fees." Wall Street Journal (Mon., May 5, 2008): B1.

GuruTop20table.gif

Source of table:

ERIN WHITE. "What Influential Business Thinkers Focus On; Top Gurus Ponder Manager's Worries, New Approaches." Wall Street Journal (Mon., May 5, 2008): B6.

(Note: the online version of the article has the title: "Quest for Innovation, Motivation Inspires the Gurus; Leading Thinkers Apply Varied Skills For Global Solutions.")




May 12, 2008

United States Making More Output with Less Physical Input: An Almost Lighter Economy


(p. 492) The long-standing trend away from value produced by manual labor and natural resources and toward the intangible value-added we associate with the digital econnomy can be expected to continue. Today it takes a lot less physical material to produce a unit of output than it did in generations past. Indeed, the physical amount of materials and fuels either consumed in the production of output or embodied in the output has increased very modestly over the past half century. The output of our economy is not quite literally lighter, but it is close.

Thin fiber-optic cable, for instance, has replaced huge tonnages of copper wire. New architectural, engineering, and materials technologies have enabled the construction of buildings enclosing the same space with far less physical material than was required fifty or one hundred years ago. Mobile phones have not only downsized but also morphed into multipurpose communication devices. The movement over the decades toward production of services that require little physical input has also been a major contributor to the marked rise in the ratio of constant dollars of GDP to tons of input.


Source:

Greenspan, Alan. The Age of Turbulence: Adventures in a New World Economic Flexibility. New York: Penguin Press, 2007.

(Note: italics in original.)




May 8, 2008

Creative Destruction Brings Triumph of Brain Over Brawn in the Labor Market


(p. 435) . . . , the inexorable growth in the proportion of our GDP that is conceptual, especially technological, has increased the value of intellectual power relative to the value of human brawn many times over many generations. I am old enough to remember when physical prowess on the job was the source of legend and reverence. A large statue of Paul Bunyan, the mythical logger, still oversees the northern Minnesota lake country. Stevedores of a century ago were extolled for their brute strength. Today, the activities once carried out by stevedores are often run by young women at a computer console.

Source:

Greenspan, Alan. The Age of Turbulence: Adventures in a New World Economic Flexibility. New York: Penguin Press, 2007.




April 8, 2008

Income of Rich "Largely Invested in the Tools and Knowledge of Production"


In the passage below, Nobel-Prize-winner Vernon Smith brings our attention to an intriguing passage from Adam Smith's "The Theory of Moral Sentiments" (1759).

In the development of new products from the process of creative destruction, new products sometimes start out as expensive, and are only purchased by the rich. This allows the new industry to survive until economies of scale, and more efficient production techniques are achieved. Eventually, as efficiencies are achieved, prices decline. An example would be the early years of the development of autmobiles. (One source for this example is Blue Ocean Strategy, pp. 193-194).

(p. A20) . . . the income of the rich is largely invested in the tools and knowledge of production, which provide future long-term value for everyone: "The rich only select from the heap what is most precious and agreeable . . . though they mean only their own conveniency . . . [and] . . . the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements."

For the full commentary, see:

VERNON L. SMITH. "The Clinton Housing Bubble." The Wall Street Journal (Tues., December 18, 2007): A20.




March 31, 2008

Creative Destruction in the Film Industry


(p. B1) While film still is central in big Hollywood features, it's unclear how long it will be before even the biggest feature movies go all- digital. The buzz in technical movie-making circles these days involves the two-month-old, ultra-high-resolution digital Red camera. Boosters say it looks nearly as good as 35mm film -- and costs around $30,000, or about the same as renting a 35mm camera for 10 days.

Thanks to cheap computers, a similar sort of creative destruction is happening everywhere in the industry. Color adjustment used to require expensive oscilloscope-like monitors. It first moved to specialized -- and expensive -- software, but lately it's done with relatively low- cost (say, $200) "plug-ins" by companies like Red Giant Software.


For the full story, see:

Lee Gomes. "Editing on Big Films Is Now Being Done On Small Computers." Wall Street Journal (Weds., Oct. 24, 2007): B1.




February 24, 2008

Innovative New Products Often Expensive at First, But Price Soon Falls


AdoptionInnovationsGraph.gif Source of graph: online version of the NYT article quoted and cited below.

(p. 14) To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

As the second chart, on the spread of consumption, shows, this wasn't always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most -- the amount of time one had to put in at work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.


For the full commentary, see:

W. MICHAEL COX and RICHARD ALM. "You Are What You Spend." The New York Times Company, Week in Review section (Sun., February 10, 2008): 14.




February 8, 2008

Schumpeter in The Age of Turbulence

 

AgeOfTurbulenceBK.jpg    Source of book image:  http://us.penguingroup.com/nf/Book/BookDisplay/0,,9781594201318,00.html#  

 

Joseph Schumpeter was born on this date in 1883.

Alan Greenspan's much-discussed memoir, is full of thoughtful discussions of Schumpeter's central mesage of creative destruction.  Here are a few lines from the first of those discussions:

 

(p. 48)  Working with heavy industry gave me a profound appreciation of the central dynamic of capitalism.  "Creative destruction" is an idea that was articulated by the Harvard economist Joseph Schumpeter in 1942.  LIke many powerful ideas, his is simple:  A market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones.  I read Schumpeter in my twenties and always thought he was right, and I've watched the process at work through my entire career. 

 

The reference to Greenspan's book is:

Greenspan, Alan. The Age of Turbulence: Adventures in a New World Economic Flexibility. New York: Penguin Press, 2007. 

 




January 27, 2008

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

 

       "Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday" (January 22. 2008).  Source of caption and photo:  online version of the NYT commentary quoted and cited below. 

 

Raghuram Rajan is mentioned in the article quoted below.  I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development. 

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception.  Rajan argued that the main problem was one of misguided incentives.  Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks.  The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high.  The high-flying investors probably had some knowledge of this, but the public did not.  In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses.  But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses.  Instead of handing them out annually, let them become vested only after observing the investment's track record for several years.  If the investment goes south before the bonus is vested, the trader does not get the bonus.  This would provide an incentive and reward for those who accurately accessed the risk of their investments. 

 

(p. A1)  . . . , Wall Street hasn't yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody's Economy.com. They're not being dishonest; they just haven't untangled all of their complex investments.

"Part of the big uncertainty," Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, "is where the bodies are buried."

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms' holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

 

For the full commentary, see: 

DAVID LEONHARDT.  "ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage."  The New York Times  (Weds., January 23, 2008):  A1 & A23.

(Note:  ellipsis added.)

 

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales.  Saving Capitalism from the Capitalists:  Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity.  New York:  Crown, 2003.

 




December 25, 2007

"Adopt the Schumpeterian Ethos of Creative Destruction"

 

   Source of graphic:  online version of the WSJ article quoted and cited below.

 

(p. R10)  High-technology industries are tough places to do business.

Competition is constant, fierce and characterized by only temporary advantage, fueled by the ease with which software makers and other high-tech companies can copy and distribute new products and services.

Instantaneous delivery through the Internet to hundreds of millions of consumers means a company with a slightly better online marketplace or search engine, for example, can quickly dominate the market, and just as easily be dethroned by a rival with a new approach.

If this brutal competitive cycle -- first described as "creative destruction" by Austrian economist Joseph Schumpeter in 1942 -- makes you uncomfortable, we've got some bad news.

We've been studying competition in all U.S. industries, not just the high-tech ones, and we've observed a remarkable pattern: On average, the whole U.S. economy has become more "Schumpeterian" since the mid-1990s. What's more, these changes have been greatest in the industries that buy the most software and computer hardware.

Over the past dozen years, in other words, information-technology consumption is associated with the kinds of competitive dynamics we're accustomed to seeing in the IT-producing industries. And because every industry will become even more IT-intensive over the next decade, we expect competition to become even more Schumpeterian.

. . .

(p. R11)  For executives, the key lesson is to treat information-technology efforts as opportunities to define and deploy new ways of working, rather than just projects to install, configure or integrate systems. Our work suggests three broad areas of focus for top managers:

- First, they need to look at how the company should be doing business differently. That means deciding what new tasks should be enabled with technology, and how widely they should be deployed.

- Second, managers need to lead the deployment of new procedures to success. People don't like changes to their jobs dictated from outside and embedded in software. Overcoming this inertia and resistance requires skillful leadership.

- Third, managers need to foster innovation by encouraging experimentation, collaboration, dialogue and all of the other activities that generate good ideas. That means building a technology infrastructure and an accompanying set of practices that reduce the cost of creating and replicating process innovations.

Managers might not want competition in their industry to become more Schumpeterian, but they don't have a choice. Companies are using IT to increase the speed of process innovation and replication. These companies drive the competitive dynamics of their industries, rather than reacting to them, leaving their rivals with a stark choice: Adopt the Schumpeterian ethos of creative destruction, or watch from the sidelines as others increasingly gain market share and value.

 

For the full story, see: 

ANDREW MCAFEE and ERIK BRYNJOLFSSON.  "Technology; Dog Eat Dog; Be warned: Industries that buy a lot of technology are becoming as cutthroat as those that produce technology."  The Wall Street Journal  (Sat., April 28, 2007):  R10 & R11. 

(Note:  ellipsis added.)

 




December 21, 2007

"People Giddy on Hope and Thrilled to Be Changing"

 

   "Emily Prager at her lane house in Shanghai."  Source of caption and photo:  online version of the NYT article quoted and cited below.   

 

The centers of dynamism are not set in stone.  I once asked the philosopher Alan Donagan why the Scottish enlightenment had occurred where (Edinburgh) and when (in the mid-late 18th century) it did.  With his usual good humor he told me that I was asking a bad question--that my question assumed that enlightenments were determined.  He instead believed that they were chance occurrences resulting from the free-will choices of individuals.

I think that there was something to what he said.  But I also believe that some institutions, and some policies of government, can greatly increase the probability that fruitful dynamism will occur.  For instance, free markets tend to tolerate diversity and experimentation, and to reward initiative. 

In the past, locations of economic dynamism, also were often locations of intellectual dynamism.  I wonder if the connection is still true today, and if not, why not? 

Among past centers of dynamism were Miletus, Athens, Florence, Amsterdam, Edinburgh, and New York City.  Today, centers of economic dynamism include Las Vegas, Dubai and Shanghai.  The article quoted below paints a generally appealing picture of Shanghai.

 

(p. D1)  I decided to move myself and my 12-year-old daughter, Lulu — whom I had adopted as a baby in China — from the old capital of the world to the new: to make a home in Shanghai, a city of the future.

I knew something about Shanghai, having been here on trips several times in the last few years. The city was always so excited it could hardly contain itself. It is a microcosm of the Asian boom, stuffed with people giddy on hope and thrilled to be changing. It recalls the greatness of New York in the early ’70s, except for one thing: Like the rest of China, Shanghai was largely closed to the outside world, and real economic growth, for nearly 50 years after World War II. It is a place where every car on the road is brand new and every pet recently acquired, but the person you just met might trace his family back 70 generations. The modernity and polish that Manhattan learned between 1945 and 1995, Shanghai is cramming for as fast as it can, and it’s fascinating to watch.

. . .

(p. D6)  Pets are new to Chinese people and they don’t know very much about them. Dogs are not neutered and they are walked without leashes. Many people are terrified of dogs, particularly given the country’s serious rabies problem.

Twice when I was walking Skippy, young women caught sight of him and screamed in terror at the top of their lungs. Because having a pet is so new, there is a video showing how to pick up after a dog and wash his paws after his walk, which appears many times a day on a huge video screen on Huaihai, the city’s other main shopping street.

 

For the full story, see: 

EMILY PRAGER. "At Home Abroad; Settling Down in a City in Motion."  The New York Times  (Thurs., July 19, 2007):  D1 & D6. 

(Note:  ellipsis added.)

 

   "On the streets of Shanghai, the author's injured foot attracts less attention than her pet dog, still a rare sight in the city."  Source of caption and photo:  online version of the NYT article quoted and cited above.

 




November 6, 2007

Process Innovations Are Neglected, But Important

 

In discussing the process of creative destruction, Schumpeter mentioned both product and process innovations.  By far the greater attention has been given to product innovations.  But maybe process innovations deserve more attention than they have received:

 

Snazzy products are the stuff of legends, romanticized by “early adopters” and skewered by neo-Luddites. Yet while these products bring glory to companies, novel processes are often more important in keeping the cash registers ringing.

. . .

Consider the question of Google’s greatest business secret. Is it the algorithms behind its search tools? Or is it the way it organizes vast clusters of computers around the globe to answer queries so quickly? Perhaps predictably, Google won’t disclose the number of computers deployed in its vast information network (though outsiders speculate that the network has at least 450,000 computers).

I believe that the physical network is Google’s “secret sauce,” its premier competitive advantage. While a brilliant lone wolf can conceive of a dazzling algorithm, only a superwealthy and well-managed organization can run what is arguably the most valuable computer network on the planet. Without the computer network, Google is nothing.

Eric E. Schmidt, Google’s chief executive, appears to agree. Last year he declared, “We believe we get tremendous competitive advantage by essentially building our own infrastructures.”

Process innovations like Google’s computer network are often invisible to the public, and impossible to duplicate by rivals. Yet successful companies realize that maintaining competitive advantage depends heavily on sustaining process innovations.

 

For the full commentary, see: 

G. PASCAL ZACHARY. "PING; The Unsung Heroes Who Move Products Forward." The New York Times, SundayBusiness Section (Sun., September 30, 2007): 3.

(Note:  ellipsis added.)

 




September 28, 2007

"We're Not Looking to Achieve Incremental Advances"

 

LevinsonArthurGenentechCEO.jpg   Genentech CEO Dr. Arthur D. Levinson.  Source of image:  online version of the WSJ article cited below.

 

(p. B1)  WSJ: You have multiple blockbuster biotech drugs on the market and more on the way. In such an uncertain business, how do you manage scientists to achieve that kind of success?

Dr. Levinson: We are first and foremost committed to doing great science. If a drug can't be the first in class or the best in class, we're just not interested. We're not looking to achieve incremental advances or extend patents or do X, Y, Z unless it is going to really matter for patients. That allows us to bring in phenomenal scientists and encourage them to do the basic and translational research.

We decided 15 years ago that we would be committing (p. B2) to oncology, which at the time for us was new. We are now the leading producer of anticancer drugs in the United States. We took a lot of risks. In many cases, those risks paid off. We are now also in immunology. Again, the role of management here is to set the broad direction and then hire absolutely the best scientists and bring them in and say, 'Do your stuff.'

 

For the full interview, see:

MARILYN CHASE. The Wall Street Journal "How Genentech Wins At Blockbuster Drugs CEO to Critics of Prices: 'Give Me a Break'."   The Wall Street Journal  (Tues., June 5, 2007):  B1 & B2.

 

 GenentechStockPrices.gif   Source of graph:  online version of the WSJ article cited above.

 




September 22, 2007

Florence in Its Prime: Ghiberti's "Gates of Paradise"

In my work on the labor economics of the process of creative destruction, I make use of the competition between Ghiberti and Brunelleschi over who would do the bronze door panels.  Brunelleschi withdrew, after a "tie" decision from the judges.  He then retooled, and bult the marvelous dome that is still one of the world's architectural marvels.

 

If Michelangelo's "David" heads the "must see" list of Renaissance masterpieces for most visitors to Florence, then I suspect "The Gates of Paradise," Lorenzo Ghiberti's monumental doors of the Baptistery of San Giovanni, rank a close second. The 20-foot-tall portal -- 10 exquisitely articulated gilt bronze reliefs of Old Testament scenes, framed by standing prophets, foliage and projecting heads -- has mesmerized viewers since its completion in 1452. Michelangelo himself is supposed to have given the doors the name by which they are still known.

. . .

Next year, visitors to Florence will again see "The Gates" restored to their full splendor, permanently installed in the Museo dell'Opera del Duomo.  

 

For the full commentary, see: 

KAREN WILKIN.  "Ghiberti's Doors Are Heavenly Again."   The Wall Street Journal  (Tues., June 5, 2007):  D5.

(Note:  ellipsis added.)

 




July 19, 2007

Sturm und Drang Schumpeterianism

 

I am conflicted about how to evaluate Zachary's Schumpeterian article in a recent Sunday New York Times.  On the one hand he says much that is true and useful about Schumpeter and capitalism.  On the other hand he seems to relish the destructive side of creative destruction, extending it beyond what Schumpeter intended, to include disasters such as war and environmental crises.

My view, on the other hand, is that the destructive side is usually over-estimated, can be reduced further, and is an unfortunate cost of innovation and progress.

Here is a part of the Zachary op-ed piece that I like:

 

An Austrian economist who taught at Harvard, Mr. Schumpeter in 1942 coined the term ''creative destruction'' to describe what he viewed as the engine of capitalism: how new products and processes constantly overtake existing ones. In his classic work, ''Capitalism, Socialism and Democracy,'' he described how unexpected innovations destroyed markets and gave rise to new fortunes.

The historian Thomas K. McCraw writes in his new biography of Schumpeter, ''Prophet of Innovation'' (Belknap Press): ''Schumpeter's signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses, no matter how strong they seem to be at a given moment, ultimately fail and almost always because they failed to innovate.''

Mr. Schumpeter's concept of creative destruction is justly celebrated. The economics writer David Warsh calls it the most memorable economic phrase since Adam Smith's ''invisible hand.'' Peter Drucker, the late business guru, went so far as to declare Mr. Schumpeter the most influential economist of the last century.

Clearly, any quick survey of technological change validates Mr. Schumpeter's essential insight. The DVD destroyed the videotape (and the businesses around it). The computer obliterated the typewriter. The automobile turned the horse and buggy into an anachronism.

Today, the Web is destroying many businesses even as it gives rise to others. Though the compact disc still lives, downloadable music is threatening to make the record album history.

''Schumpeter's central idea is just as important now as ever,'' says Louis Galambos, a business historian at Johns Hopkins University. ''The heart of capitalism and its claim as an efficient economic system over the long term is the role that innovation plays.''

 

For the full commentary, see:

G. PASCAL ZACHARY.  "PING; The Silver Lining to Impending Doom."  The New York Times, Section 3  (Sun., May 6, 2007):   3.

 




May 22, 2007

Why Starbucks Coffee is a Bargain

 

(p. 161)  These coffee places, most of which didn't even exist ten years ago, had several virtues.  They were always in convenient locations.  They permitted, even welcomed, patrons to sit and talk for several hours.  And they had tables for spreading out my materials and electrical outlets for plugging in my equipment.  In short, they provided a four-hour office rental for the price of a three-dollar latte.

. . .  

(p. 162)  Starbucks and its caffeinated cousins are part of what I call the free agent infrastructure.  The components of this infrastructure, which I'll review in a moment, include copy shops, office supply superstores, bookstore cafés, overnight delivery services, executive suites, and the Internet.  Like America's system of federal highways, the free agent infrastructures form the physical foundation on which the economy operates.  But unlike the federal highway system, which was planned and paid for by the government, this infrastructure emerged more or less spontaneously.  Like so many other aspects of Free Agent Nation, it is self-organized.  Nobody is in charge of it.  That's why it woks.  It  works so well, in fact, that few people realize that this collection of commercial Establishments even constitutes an infrastructure.

 

Source:

Pink, Daniel H. Free Agent Nation: How America's New Independent Workers Are Transforming the Way We Live. New York: Warner Business Books, 2001.

 




May 20, 2007

Should Netscape Be Viewed as a Failed Company, or as a Successful Project?

 

(p. 53)  Recall the story of Netscape, once the darling of the New Economy.  Netscape was formed in 1994.  It went public in 1995.  And by 1999, it was gone, purchased by America Online and subsumed into AOL's operation.  Life span:  four years.  Half-life:  two years.  Was Netscape a company---or was it really a project?  Does the distinction even matter?  What matters most is that this short-lived entity put several products on the market, prompted established companies (notably Microsoft) to shift strategies, and (p. 54) equipped a few thousand individuals with experience, wealth, and connections that they could bring to their next project.

And Netscape is not alone.  A University of Texas study found that between 1970 and 1992, the half-life of Texas businesses shrank by 50 percent.  Likewise, a Federal Reserve analysis of New York companies found that the type of firm that created the most new jobs (microbusineses with fewer than ten employees) often had the shortest life span.  The life cycle of companies has been that jobs, too, have diminishing half-lives.  Ten years ago, nobody ever heard of a Web developer.  Ten years from now, nobody may remember Web developers.

Most important, at the very moment the longevity of companies is shrinking, the longevity of individuals is expanding.  Unlike Americans in the twentieth century, most of us today can expect to outlive just about any organization for which we work.  It's hard to imagine a lifelong job at an organization whose lifetime will be shorter--often much shorter--than your own.

 

Source:

Pink, Daniel H. Free Agent Nation: How America's New Independent Workers Are Transforming the Way We Live. New York: Warner Business Books, 2001.

 




May 18, 2007

"Free Agent Nation" Still Rings True

 

   Source of book image:  http://g-ec2.images-amazon.com/images/G/01/ciu/10/ae/8ca3d250fca0f5b077de4010.L.jpg

 

Daniel Pink's 2001 Free Agent Nation has been on my to-read list since it first came out.  It finally made it to the top---at least in the author-abridged two-cassette incarnation.

I always found the basic idea appealing:  the appeal of the freedom of working for yourself---Harry Browne's How I Found Freedom in an Unfree World, but for real. 

But I also was a little anxious; fearful that the book would place too much emphasis on seeming flash-in-the-pan dot.com labor market phenomena and rhetoric.

To my relief, I can report that little in the book depends on the dot.com over-exuberance.  The internet appears, as an infrastructure enabler, but the free agents are mainly doing more standard stuff, but doing it from a home office, and doing it project-by-project.

Pink is not an academic, which has pros and cons.  One of the pros is that his prose is pleasant.  Another is that he has an ear for a good story and a telling example.  Perhaps a con is that he often hasn't had the time, or the interest, (or maybe the data just don't exist) to often follow-up with how widespread his examples are.

Still there's some good stuff here.  Like suggesting that free agency is what you would expect more of us to pursue, as we work our way up Abraham Maslow's hierarchy of human needs.  (In college I was enthused enough about Maslow that I was thinking of minoring in psychology, until they told me how many hours I would have to run rats through mazes before I'd be allowed to open a Maslow book.)

And there's plausible discussion about how in some ways free agency is more secure than a regular job (multiple clients means diversification).  And there is more freedom to control your own time, and be your authentic self.

There's also some good discussion of how the government makes free agency harder through health care and taxation policies.

All-in-all, this book helps make the case that labor can thrive in a Schumpeterian world of creative destruction.

 

Reference to the book:

Pink, Daniel H. Free Agent Nation: How America's New Independent Workers Are Transforming the Way We Live. New York: Warner Business Books, 2001.

 




May 6, 2007

"We In Las Vegas Reinvent Ourselves All the Time"

 

   Dust from the implosion of the Stardust.  Source of the photo:  online version of the NYT article cited below.

 

If any city in the United States has dynamism, it is Las Vegas.  Yet, note in the passage below, that even in Las Vegas there are those who want dynamism to die.  

 

Las Vegas has become known in recent decades for tearing down the notable resorts that first put the Strip on the map, and famous places like the Dunes, the Hacienda and the Sands have been replaced by the Bellagio, the Mandalay Bay and the Venetian.

“The Stardust was the Bellagio of its day, the most dazzling casino out there,” said Nicholas Pileggi, who spent four years researching the exploits of Frank Rosenthal, the mobster who ran the Stardust, for his best-selling nonfiction book “Casino” and the fictionalized screenplay for the Robert DeNiro film of the same name. “But time moves on.” 

The oldest casino structure on the Strip now is a part of a coffee shop at the Sahara and dates back just 55 years.

“Unlike most other cities, we in Las Vegas reinvent ourselves all the time,” Mr. Boyd said. “In order to keep up with the competition, you have to keep improving your product. That’s what we’re going to do here at the Stardust. But we still have great memories.”

Some are not so accepting of the changes in the city. Joel Rosales, 23, owns the Web site LeavingLV.net, which pays tribute to each property that is razed.

The loss of the Stardust, Mr. Rosales said, is particularly disappointing.

“Having been born and raised here in Vegas, it’s always been a rock,” he said of the resort. “I wouldn’t say I’m as upset as I am disappointed that we as a city have no sense of preserving our past and heritage, no matter how tacky or out-of-date it may be.”

 

For the full story, see: 

STEVE FRIESS.  "Aging Resort Demolished to Make Way for a Young One."  The New York Times  (Weds., March 14, 2007):   A14.

 

    Celebration of, and then demolition of, the Stardust.  Source of the photo:  online version of the NYT article cited above.

 




April 19, 2007

Advice from Charles Koch: A Successful Business Schumpeterian

   Source of book image:  http://media.wiley.com/product_data/coverImage300/89/04701398/0470139889.jpg

 

When Charles Koch became the chief executive of Rock Island Oil & Refining after the death of his father in 1967, the company was a moderately successful enterprise based in Wichita, Kan. He renamed it Koch Industries in honor of his father -- and over the next 40 years proceeded to transform Fred Koch's legacy into the world's largest private company. Koch Industries -- now a commodity and financial conglomerate that includes brands such as Stainmaster, Lycra and Dixie cups -- has 80,000 employees in 60 countries. Its revenue last year was $90 billion. In one generation, the book value of Koch Industries has increased 2,000-fold. That's an 18% compounded annual return -- comparable with the long-term track record of Warren Buffett's Berkshire Hathaway.

. . .

At age 71, Mr. Koch clearly feels that the time has come to pass along the business formula that has served him so well. In "The Science of Success," he describes a technique, called Market-Based Management (MBM), that he says evolved from his reading, early in his career, in history, political science, economics and other disciplines. He arrived at an understanding of what allows a free society to prosper, Mr. Koch says, and decided to apply those principles to business.

. . .

. . .   He is especially fond of the "Austrian school" of economists, such as Ludwig von Mises and Joseph Schumpeter, who emphasized production processes, technology and the dynamic competitive models of "creative destruction." 

 

For the full review, see: 

MARK SKOUSEN.  "BOOKS; A Short Course in Long-Term Value."   The Wall Street Journal  (Weds., March 7, 2007):  D8. 

(Note:  ellipses added.)

 




April 15, 2007

More on Creative Destruction in Science Fiction

On April 11, 2007 I posted an entry noting a new science fiction book with the title Creative Destruction.  Not having read the book, I wondered aloud whether the book contained any reference to Schumpeter.

Yesterday (4/13/07), I was delighted to receive an email from the author of the book, answering my question.  With his permission, I reproduce his email below:

 

Dr. Diamond,

I noticed your blog entry about Creative Destruction, my computer-themed SF collection.  You asked:  Does Schumpeter get a mention?

Absolutely.  Here are the opening lines of the foreword:

     If the Internet bubble had a patron saint, he was an obscure economist named Joseph Schumpeter.

     Schumpeter owes his posthumous celebrity to two words: creative destruction.  In 1942, he wrote of the "... Process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

     "Creative destruction," he said, "is the essential fact about capitalism."  Every dotcom, of course, claimed its new technology would sweep out the old in a frenzy of creative destruction. Occasionally -- think Yahoo! and Amazon -- they were even correct.

The stories in the collection are most definitely science fiction -- I have degrees in physics and computer science -- but I also have an MBA from the University of Chicago.

Best regards,

- Ed Lerner

 

(Note:  I have changed the format of the email, a little.  The ellipsis was in the original.)

 




April 11, 2007

Creative Destruction in Science Fiction

Source of book image: http://ec1.images-amazon.com/images/P/0809557487.01._SS500_SCLZZZZZZZ_V38973347_.jpg

 

There's a new collection of science fiction stories entitled Creative Destruction (after one of the main stories in the collection that is also entitled "Creative Destruction").  I have not read the book, but used to enjoy reading science fiction, and hope to have a look before too long.

I welcome comments from anyone who has read the book.  Does Schumpeter get a mention? 

 

The reference to the book is:

Lerner, Edward M. Creative Destruction. Rockville, MD: Wildside Press, 2006.

 




April 8, 2007

Kodak Tries to Survive Creative Destruction

   A Kodak digital production printer.  Source of photo:  online version of the NYT article cited below. 

 

Digital photography replacing film technology is an example of Schumpeter's process of creative destruction, and maybe also of the gradual growth of a disruptive technology.  Leading incumbent firms frequently have trouble prospering, or even surviving, during such a change.  Both the Wall Street Journal and the New York Times had articles on the latest news from Kodak.  Here is an excerpt from the New York Times version:  

 

On Tuesday, as the Eastman Kodak Company unveiled its long-anticipated consumer inkjet printer in New York, the mood at the company’s Rochester headquarters could not have been more positive.

“People know we are back on the offensive,” said Frank Sklarsky, Kodak’s chief financial officer.  “And that’s making them a lot more charged up about coming to work.”

But yesterday, Kodak gave them reason again to feel depressed.  The company said it would cut 3,000 more jobs this year, on top of the 25,000 to 27,000 it had already said would be gone by the end of 2007.  At that rate, Kodak will end the year with about 30,000 employees, half the number of just three years ago and a fraction of the 145,000 people it employed in 1988, when its brand was synonymous with photography.

Kodak executives insist that the new cuts do not indicate any snags in the continuing struggle to transform itself from a film-based company into a major competitor in digital imagery.  And analysts, too, say the cuts are inevitable, and probably healthy.

 

For the full NYT story, see: 

CLAUDIA H. DEUTSCH.  "Shrinking Pains at Kodak."  The New York Times   (Fri., February 9, 2007): C1 & C4.

 

For the related WSJ story, see: 

WILLIAM M. BULKELEY and ANGELA PRUITT.  "Kodak Sees More Job Cuts, Higher Restructuring Costs."  The Wall Street Journal  (Fri., February 9, 2007):  B4.

 

 

 KodakJobsBarGraph.gif KodakJobsGraph.gif PrinterMarketSharePieChart.gif   Source of the first and third graphic:  the WSJ article cited above.  Source of the second graphic:  the NYT article cited above.

 




April 7, 2007

Woodrow Wilson: The Automobile is "a Picture of the Arrogance of Wealth"

It is the common characteristic of new products from creative destruction that new products are first so expensive that only the rich can afford them, but then fairly soon, usually within a few years at most, the price falls to the level that ordinary people can afford.  At that point, what the rich gets are added features, at a high premium, but the basic product is widely available.  Consider the automobile:

 

(p. 193)  The autos of the time were a luxurious novelty.  One model even offered electric curlers in the back seat for on-the-go primping.  They were unreliable and expensive, costing around $1,500, twice the average annual family income.  And they were enormously unpopular.  Anticar activists tore up roads, ringed parked cars with barbed wire, and organized boycotts of car-driving businessmen and politicians.  Public resentment of the automobile was so great that even future president Woodrow Wilson weighed in, saying, "Nothing has spread socialistic feeling more than the automobile . . . a picture of the arrogance of wealth."  Literary Digest suggested, "The ordinary 'horseless carriage' is at present a luxury for the wealthy; and although its price will probably fall in the future, it will never, of course, come into as common use as the bicycle."

 

Source:

Kim, W. Chan, and Renée Mauborgne. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press, 2005.

(Note:  ellipsis in original.  Also, the book provides sources for each quote in the passage above.)

 




April 4, 2007

Preventing Creative Destruction Slows Economic Growth

 

GrowthRatesUS-Eur-JapanGraphic.jpg   Source of graphic:  online version of the NYT article cited below. 

 

It would be interesting to explore why the gap in growth rates was smaller last year than previously.  Was it a statistical fluke?  Or did the U.S. labor market become somewhat less flexible?  Or maybe the job market in Europe and Japan became somewhat more flexible? 

 

FOR more than a decade, many American economists have pointed to Europe and Japan as prima facie evidence that layoffs in the United States are a good thing. The economies in those countries were not nearly as robust as this country’s. And the reason? Too much job security in Europe and Japan, the economists said.

American employers, in sharp contrast, have operated with much more “flexibility.” Hiring and firing at will, they shift labor from where it is not needed to where it is needed. If Eastman Kodak is struggling to establish itself in digital photography, then Kodak downsizes and labor moves to industries and companies that are thriving — software, for example, or health care, or Wal-Mart Stores or Caterpillar.

This shuffling out of one job and into another shows up in the statistics as nearly full employment. Never mind that the shuffling does not work as efficiently as the description implies or that many of the laid-off workers find themselves earning less in their next jobs, an income roller coaster that is absent in Europe and Japan. A dynamic economy leaves no alternative, or so the reasoning goes among mainstream economists.

“Trying to prevent this creative destruction from happening is a recipe for less economic growth and less productivity,” said Barry Eichengreen, an international economist at the University of California, Berkeley.

 

For the full commentary, see: 

LOUIS UCHITELLE.  "ECONOMIC VIEW; Job Security, Too, May Have a Happy Medium."  The New York Times, Section 3 (Sun., February 25, 2007):  5.

 




February 22, 2007

Pay Rebounds in Silicon Valley

   Source of graphic:  online version of the WSJ article cited below.

 

Silicon Valley's nascent economic recovery gathered steam last year, with the nation's technology capital adding more than 30,000 jobs and showing gains in areas such as average annual wages and household income.

That was the conclusion of an annual report from Joint Venture Silicon Valley, a nonprofit group representing businesses and government agencies in the San Francisco and San Jose, Calif., area.

"Silicon Valley is back and it's rebooting," said Russell Hancock, Joint Venture's president and chief executive. "This is familiar since the Valley has already done it five or six times over its history. It regroups, then reboots."

The report comes as Silicon Valley, which prospered during the dot-com frenzy in the late 1990s, has struggled to remake itself in the wake of the tech crash in 2000. In the years since, the region has experienced job losses and a slowdown in growth at many tech companies. The area began to turn the corner in 2005 when a net gain of 2,000 jobs was recorded, the first time since 2001 that there had been an overall increase in jobs. Start-up activity has also become widespread again, with Internet firms specializing in online video, social networking and "clean technology" springing up.

 

For the full story, see:

PUI-WING TAM.  "No Longer Down in Silicon Valley Jobs, Wages Show Gains As Bust Fades Further; Small Firms Fuel Rebound."  The Wall Street Journal  (Mon., January 29, 2007):  B5.

 




January 21, 2007

Barney Frank on Schumpeter's "Great Concept"

FrankBarney.jpg   Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

 

Policy-makers are often enthused by the innovation unleashed by Schumpeter's process of creative destruction, but draw back out of fear of the destruction of jobs.  In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear.  More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled.  The pain is less than usually thought, and the gain is greater. 

 

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don't care about economic growth.  Not surprising.  Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don't see that they're going to be part of the new creation.

 

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

 




January 5, 2007

Toyota Turns from Incremental Change to Revolutionary Change

 

ToyotaEfficiencyGraph.gif   Source of graph:  online version of WSJ article cited below.

 

(p. A1)  TOYOTA CITY, Japan -- The world sees Toyota Motor Corp. as an unstoppable profit juggernaut, overtaking rivals one by one as it rolls toward replacing General Motors Corp. as the world's largest auto maker.

Not Katsuaki Watanabe.  Toyota's chief executive officer is a worried man.  He thinks Toyota is losing its competitive edge as it expands around the world.  He frets that quality, the foundation of its U.S. success, is slipping.  He grouses that Toyota's factories and engineering practices aren't efficient enough.  Within the company, he has even questioned a core tenet of Toyota's corporate culture -- kaizen, the relentless focus on incremental improvement.

U.S. and European car makers have spent years struggling to overhaul outdated operations and work practices to better compete with Toyota.  By some measures, some of those companies are catching up.  Now, driven by a severe dose of institutional paranoia, Mr. Watanabe is trying to move the target.

Mr. Watanabe, 64 years old, wants kakushin, or revolutionary change in how Toyota designs cars and factories.  He is pushing Toyota to reduce the number of components it uses in a typical vehicle by half -- a radical idea that would usher in a new chapter in car design.  He also wants to create new fast and flexible plants to assemble these simplified cars.

 

For the full story, see:

NORIHIKO SHIROUZU.  "Paranoid Tendency As Rivals Catch Up,Toyota CEO Spurs Big Efficiency Drive Culture of Institutional Worry Drives Mr. Watanabe; How Paint Is Like 'Fondue' Finding Limits to Improvement."  Wall Street Journal   (Sat., December 9, 2006):  A1 & A6.

(I thank Aaron Brown for bringing this article to my attention.)

 




December 21, 2006

Silicon Graphics' Jim Clark Understood Disruptive Innovation

There's a great passage in The New, New Thing about Jim Clark trying to convince Silicon Graphics to produce a PC.  Clark talks about how hard it is for a company to create a product that competes with itself. 

Shades of Clayton Christensen:

 

Clark thought that Silicon Graphics had to "cannibalize" itself.  For a technology company to succeed, he argued, it needed always to be looking to destroy itself.  If it didn't, someone else would.  "It's the hardest thing in business to do," he would say.  "Even creating a lower-cost product runs against the grain, because the low-cost products undercut the high-cost, more profitable products."  Everyone in a successful company, from the CEO on down, has a stake in whatever the company is currently selling.  It does not naturally occur to anyone to find a way to undermine that creative destruction, and he was prepared to do the deed.  He wanted Silicon Graphics to operate in the same self-corrosive spirit.  (p. 66 of hb edition)

 

The reference to The New, New Thing is:

Lewis, Michael. The New New Thing: A Silicon Valley Story. New York: W. W. Norton & Company, 2000.

Christensen's most important book is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator's Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.




November 21, 2006

"Come With Me, If You Want to Live"

Schumpeter famously stated that creative destruction is "the essential fact" about capitalism.  Was he right? 

To determine what is "the essential fact" you need to first answer the question "essential for what purpose?"  If the purpose is "life, liberty, and the pursuit of happiness" then I think you can show that creative detruction is indeed the essential fact about capitalism; in the key sense that with creative destruction you have a form of capitalism that is best able to enhance "live, liberty, and the pursuit of happiness."

The Terminator famously said "Come with me, if you want to live!" ("Terminator 2: Judgment Day," 1991).  Life is a choice.  You can choose death instead.  Most people, most of the time, choose life. But there are examples of choosing death.  E.g., Leon Kass, an oft-quoted "expert" on medical ethics issues, is against current efforts to lengthen the human life span:

(p. D4)  While an anti-aging pill may be the next big blockbuster, some ethicists believe that the all-out determination to extend life span is veined with arrogance.  As appointments with death are postponed, says Dr. Leon R. Kass, former chairman of the President’s Council on Bioethics, human lives may become less engaging, less meaningful, even less beautiful.

“Mortality makes life matter,” Dr. Kass recently wrote.  “Immortality is a kind of oblivion — like death itself.”

That man’s time on this planet is limited, and rightfully so, is a cultural belief deeply held by many.  But whether an increasing life span affords greater opportunity to find meaning or distracts from the pursuit, the prospect has become too great a temptation to ignore — least of all, for scientists.

“It’s a just big waste of talent and wisdom to have people die in their 60s and 70s,” said Dr. Sinclair of Harvard.

(And there's the occasional hermit, like the unibomber, who chooses to live a brutish life without electricity and indoor plumbing.)  So long as I, Arnold, and our compatriots, are allowed an island somewhere to peacefully pursue life, I do not much care what Leon and his friends do.  My argument, and the book I am writing on creative destruction, are not written for Leon.  They are written for all those who choose life, liberty, and the pursuit of happiness.

 

The NYT quote related to Leon Kass's praise of mortality, is from p. D4 of:

MICHAEL MASON.  "One for the Ages:  A Prescription That May Extend Life."  The New York Times  (Tues., October 31, 2006):  D1 & D4. 

 




November 8, 2006

Gerstner's Insights on Business

 Source of book image:  http://ec1.images-amazon.com/images/P/0060523794.01._SS500_SCLZZZZZZZ_V1122531345_.jpg

 

Gerstner is known for turning around IBM, when many business experts thought it was headed down the tubes.  His book is useful as a report on what happened at IBM during his time as CEO, and also has some more broadly applicable observations.  I'll mention a few of these in this and a few other postings in the next couple of weeks. 

It is interesting how many successful and important business leaders and experts have spent some time associated with the McKinsey consulting group, where Gerstner started his career.  One major McKinsey figure, Richard Foster, is a strong advocate and elaborator of Schumpeter's process of creative destruction. 

I wonder if perhaps some of the success of McKinsey is due to the firm's embracing and applying Schumpeter's ideas?

Those who oppose creative destruction emphasize the destructive effect that the process has on some workers.  In fact the effects on labor are seen by many (e.g., Thomas Friedman) who are otherwise sympathetic, to be the major drawback of the process.  As a result some of them (e.g., Thomas Friedman) propose paternalistic 'safety net' labor policies.

We usually think of government as the main implementer of such policies, but among firms, IBM's labor policies were among the most paternalistic.  This is usually viewed as one of the positives about IBM.  But one of Gerstner's insights is to suggest that some of those in the IBM work force were hurt by IBM's paternalistic policies:

(p. 186)  . . . I came to feel that the real problem was not that employees felt they were entitled.  They had just become accustomed to immunity from things like recessions, price wars, and technology changes.  And for the most part, they didn't even realize that this self-contained, insulated system also worked against them.  I was shocked, for instance, to discover the pay disparities---particularly in very important technical and sales professions---of IBM comployess when comapred to the competition and the industry in general.  Our best people weren't getting what they deserved.

Maybe I should mention that I don't endorse everything in the book.  For example, Gerstner seems to think that a desire to "win" is crucial to success in business.  But I think the analogy between business and competitive sports is usually taken too far.  Can't one also succeed in business from a desire to innovate and to improve the world?

 

The reference on the book is: 

Gerstner, Louis V., Jr.  Who Says Elephants Can't Dance? Leading a Great Enterprise through Dramatic Change.  New York:  HarperCollins, 2002.

(Note:  in the quote, the ellipsis was added, but the italics was in the original.)

 




October 18, 2006

"Man in White Suit" Science Fiction, Now Nearly Science Fact

PART of what sold James Tirey on a change in attire was the coffee spilled on his legs during a rough flight.  ''It stayed sticky until it dried,'' he said, ''about mid-Atlantic.''

To avoid such incidents, he bought a new pair of pants with an invisible, high-tech surface suited to the exigencies of business travel.  These pants look and feel like most others, but the ingenious finish on the fabric is different:  it is made of tiny, nanosized particles that repel water, ketchup, honey, blood, vinaigrette and a thousand other potential indignities.  With such a surface, he said, ''if coffee is spilled on you, it just beads up'' or runs off.  The pants can be wiped with a paper napkin -- even the skimpy cocktail kind handed out on airplanes -- leaving the material dry and unscathed.

Mr. Tirey, who lives in northern Virginia, bought his pants, called the Steel Pant, at Beyond, a Eugene, Ore., company that makes and sells outerwear for men and women at BeyondFleece.com.  The material is manufactured by the Swiss company Schoeller Textil, which makes both the weave and the nanofinish, called NanoSphere.  On the Beyond Web site, the pants cost $119, the nanocoating an additional $15.  ''It was definitely worth the money,'' Mr. Tirey said of the purchase.

 

For the full story, see: 

ANNE EISENBERG.  "NOVELTIES; The Chemist's Find: A Way to Shrug Off Spills." The New York Times , Section 3(Sun., August 27, 2006):  5. 




August 21, 2006

Big Business Is Often Bashed, But Is Not Always Bad

(p. 4) BUSINESS bashing by politicians in America has a long history, including rhetoric far more inflammatory than the denunciations being directed at Wal-Mart this year by some Democrats, who sometimes sound as if they are running against the company instead of another politician.

. . .

The company may not appreciate the honor, but its place in the political debate reflects its revolutionary effect on the American economy.

Put simply, the big winners as the economy changes have often been scary to many, particularly those with a stake in the old economic order being torn asunder.

“Twice as many Americans shop at Wal-Mart over the course of a year than voted in the last presidential election,” said H. Lee Scott Jr., the company’s chief executive, in a speech to the National Governors Association in February.

Wal-Mart’s success reflects its ability to charge less for a wide range of goods.  That arguably has reduced inflation and made the economy more efficient.  It has introduced innovations in managing inventory and shipping goods.

. . .

But the fact that Wal-Mart has more shoppers than any politician has voters shows that many of those workers — and many people higher on the income scale — find its prices irresistible.  That group no doubt includes some of the company’s critics.

Previous business targets of politicians have similarly been both popular and reviled.  The railroads enabled much of America to prosper, but to many people in the late 19th century they were viewed as villains.

They upset old economic relationships by making it possible to ship goods over much longer distances, thus introducing competition for local businesses and farms.

 

For the full commentary, see:

FLOYD NORRIS.  "THE NATION; Swiping at Industry From Atop the Stump."  The New York Times, Section 4  (Sun., August 20, 2006):  4.

(Note:  ellipses added.)

 

   Illinois protesters bashing Wal-Mart during the summer of 2006.  Source of photo:  online version of the NYT article cited above.

 




August 15, 2006

More and Better Jobs Gained by 'Insourcing' than are Lost to 'Outsourcing'

  N. Gregory Mankiw, former chair of W.'s Council of Economic Advisors. The media, most Democrats, and some Republicans, skewered Mankiw in 2004 for simply and clearly stating the truth about outsourcing. Source of photo:  online version of the NYT article cited below.

 

In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year.  That’s a drop in the bucket.  In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics.  Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year.  Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.

What’s more, the threat of outsourcing varies widely by industry.  Lots of services require face-to-face interaction for people to do their jobs.  That is particularly true for the biggest sectors, retail and health care.  As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced.  By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore.  But those sectors account for only about 2 percent of total employment.  The upshot:  “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.

Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing.  Quite the opposite.  Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).

Not surprisingly, Mr. Jensen and Professor Kletzer found that in recent years there has been greater job insecurity in the tradable job categories.  But they also concluded that jobs in those industries paid higher wages, and that tradable industries had grown faster than nontradable industries.  “That could mean that this is our competitive advantage,” Mr. Jensen says.  “In other words, what the U.S. does well is the highly skilled, higher-paid jobs within those tradable services.”

There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here.  In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.

 

For the full commentary, see:

DANIEL GROSS. "Economic View; Why ‘Outsourcing’ May Lose Its Power as a Scare Word." The New York Times, Section 3 (Sun., August 13, 2006):  5. 




August 11, 2006

U.S. Economy Can Prosper, Even if G.M. Does Not

The fragility of success for large corporations is documented in the early chapters of the Foster and Kaplan book that is mentioned below. 

(p. 1)  THE announcement last week that General Motors would cut 25,000 jobs and close several factories is yet another blow to the Goliath of automakers and its workers.  But only if you work for G.M. is the company's decline a worry.  For consumers, the decline can be seen as a symbol of healthy competition.

G.M.'s sales, market share and work force have all been falling for a generation, even as the quality of its vehicles has gone up.  Why?  Because its competitors' products have improved even more.  Today's auto buyers enjoy an unprecedented array of well-built, well-equipped, reasonably priced vehicles offered by many manufacturers.

. . .

(p. 3)  . . .  even if a new generation is drawn to G.M.'s products, recovery of its former position seems unlikely.  Other brands have improved, too:  J.D. Power estimates that for the auto industry overall, manufacturing defects declined 32 percent since 1998 alone.

There is also great pressure to hold prices down, which is bad for companies like G.M. with vast amounts of overhead.  According to the consumer price index, new cars and light trucks today cost less in real-dollar terms than in 1982, despite having air bags, antilock brakes, CD players, power windows and other features either unavailable or considered luxury options back then.

This means that during the very period that General Motors has declined, American car buyers have become better off.  Competition can have the effect of ''creative destruction,'' in the economist Joseph Schumpeter's famous term, harming workers in some places, while everyone else comes out ahead.

. . .

As it continues to shrink, G.M. may serve as an exemplar of what the world economy will do in many arenas -- knock off established leaders, while improving quality and cutting prices.  In their 2001 book ''Creative Destruction,'' Richard Foster and Sarah Kaplan, analysts at McKinsey & Company, documented how even powerhouse companies that are ''built to last'' usually succumb to competition.

Competition can be a utilitarian force that brings the greatest good to the greatest number.  Someday when the remaining divisions of General Motors are bought by some start-up company that doesn't even exist yet, try to keep that in mind.

 

For the full commentary, see: 

GREGG EASTERBROOK.  "What's Bad for G.M. Is . . ."  The New York Times, Section 4  (Sunday, June 12, 2005):  1 & 3.

(Note:  the ellipsis in the title is in the original title; the ellipses in the article, were added.)

 

The full reference to the Foster and Kaplan book, is:

Foster, Richard and Sarah Kaplan.  Creative Destruction:  Why Companies that Are Built to Last Underperform the Market---and How to Successfully Transform Them.  New York:  Currency Books, 2001.

 




August 10, 2006

Static Assumptions Undermine Economic Policy Analysis


Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism.  Yet static analysis still dominates most policy discussions.  But there is hope:


(p. A14) A bit of background:  Most official analysis of tax policy is based on what economists call "static assumptions."  While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy.  This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts.  The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

 

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW.  "Dynamic Analysis."  The Wall Street Journal  (Weds., July 26, 2006):  A14.





August 2, 2006

Life Has Improved; And Can Continue to Improve

 Source of graphic:  online version of the NYT article cited below. 

 

(p. 1)  New research from around the world has begun to reveal a picture of humans today that is so different from what it was in the past that scientists say they are startled.  Over the past 100 years, says one researcher, Robert W. Fogel of the University of Chicago, humans in the industrialized world have undergone “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth.”

. . .

(p. 19)  . . .  stressful occupations added to the burden on the body.

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

A century ago, most people were farmers, laborers or artisans who were exposed constantly to dust and fumes, Dr. Costa said. “I think there is just this long-term scarring.”

 

For the full story, see:

Health1860s1994.gif Source of graphic:  online version of the NYT article cited above. 

HealthCivilWarAndNow.gif EscapeFromHungerAndPrematureDeath1700-2100BK.jpg  Source of graphic:  online version of the NYT article cited above.  Source of book image:  http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521808782

 

Fogel's book is a primary academic source for much of what is interesting in the New York Times article.  Fogel predicts that if we don't screw things up, half of today's college students will live to be 100.  He shows that academics in the past have consistently and significantly underestimated the maximum lifespans that would be attainable in the future.

The full reference for the Fogel book is:

Fogel, Robert William. The Escape from Hunger and Premature Death, 1700-2100, Cambridge Studies in Population, Economy and Society in Past Time. Cambridge, UK: Cambridge University Press, 2004.

 




July 29, 2006

Current Workplace Revolution Benefits Labor

(p. 8)  Would you change places with your grandfather?  Would you want to work 11 brutal hours a day... in yesterday's Bethlehem Steel mill, a Ford Motor Company factory circa 1935?  Not me.  Nor would I change places with my father ... who labored in a whilte-collar sweatshop, at the same company, in the same building, for 41 l-o-n-g years.

A workplace revolution is under way.  No sensible person expects to spend a lifetime in a single corporation anymore.  Some call this shift the "end of corporate responsibility."  I call it ... the Beginning of Renewed Individual Responsibility.  An extraordinary opportunity to take charge of our own lives.

 

Source of passage:

Peters, Tom.  Re-imagine!  London: DK, 2003.

(Note:  all of the ellipses in the above passage, appear in the original.)




July 26, 2006

Intense Competition in Chip Duopoly

IntelAMDWar.gif

Phil Hester, apparently a chip hotshot, joined A.M.D. ten months ago as its technology chief, to "help lead its battle against Intel."  (Hector Ruis, mentioned below, is the C.E.O. of A.M.D.)

Mr. Hester and other A.M.D. executives say that the technology in its laboratories gives them plenty of reason for optimism, and that in some product categories Intel is just catching up to advances A.M.D. pioneered.  Just next month, for example, A.M.D. is expected to introduce improvements to Opteron, and both companies are designing chips to run cooler and consume less energy.

Much like Intel, A.M.D. is working to increase the number of processors on each chip from two to four, and the company says it will introduce new designs for servers and desktop systems that will be released in mid-2007, followed later in the year by a new design for notebooks.  Many analysts are also expecting the company to counter Intel’s pricing moves with price cuts of its own.  At A.M.D.’s annual conference for analysts last month, Mr. Hester also disclosed an unusual plan to let other manufacturers build chips that work closely with its own chips, indicating an openness and flexibility that has not been seen before in the company’s strategy.

With that effort, referred to as Torrenza, A.M.D. is licensing some of its chip specifications to other technology developers so they can add specialized functions, like advanced graphics and math processing.

“We want to open up our technology and unleash a completely new wave of innovation,” Mr. Ruiz told analysts at the conference.

Advanced Micro has picked up about five percentage points of market share over the past year, nearly all of that from Intel, according to Mercury Research.  Today, A.M.D.’s overall share is about 21 percent, to Intel’s 74 percent, and at the analyst meeting Mr. Ruiz said the goal was to have a 30 percent share by 2008.

Mr. Hester said A.M.D.’s road map for new products had not changed much since his arrival.  Mostly he has focused on improving the way employees manage projects and pushing them to develop multiple designs at one time.  He said he also emphasized cooperation inside development teams, rather than having teams compete for attention.

The competitive situation has helped with this.  “Being the underdog creates a culture of cooperation,” Mr. Hester said.

 

For the full story, see: 

LAURIE J. FLYNN.  "Jumping at the Chance to Fire Away in the Chip War."  The New York Times (Weds., July 19, 2006):  C7. 

 

(Note:  the online version of the article has a different title, viz., "A.M.D. Seeks to Gain in Its Rivalry With Intel.")




July 25, 2006

Tom Peters: Over-the-Top Schumpeterian


Source of book image:  http://www.amazon.com/gp/product/customer-reviews/078949647X/ref=cm_cr_dp_2_1/104-2835260-2878345?ie=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

 

Tom Peters became famous as the co-author of the business classic In Search of Excellence (1982).  His Re-imagine! is exuberant, optimistic, exaggerated, and stylistically over-the-top.  I find it fun, bracing, entertaining, and sometimes edifying.  If you like the prose of The Cluetrain Manifesto and Gilder's Telecosm, then you may also like Re-imagine!

Here is an early, very brief passage: 


(p. 9)  My overall vision, in brief:  Business is cool. It's about Creativity and Invention and Growth and Service.  It's about Adam Smith's "hidden hand."  And Nobel laureate Frederick Hayek's "spontaneous discovery process."  And economist Joseph Schumpeter's "gales of creative destruction."  At its best, it's about building things that make life less burdensome than it was in medieval times.  About getting us beyond---far, far, far beyond---the quasi-slavery of the Middle Ages, the indentured servitude of the first 150 years of the Industrial Revolution, and the cubicle slavery of the last three-quarters of a century. 

Yes, business is cool.

(Or at least it can be.)

 

The citation to the book is:

Peters, Tom. Re-Imagine! London: DK, 2003.

(Note:  the italics in the above passage appears that way in the original.)





July 20, 2006

Job Hopping May Aid Technological Experimentation

When employees jump from company to company, they take their knowledge with them.  ''The innovation from one firm will tend to bleed over into other firms,'' Professor Rebitzer explained.  For a given company, ''it's hard to capture the returns on your innovation,'' he went on.  ''From an economics perspective, that should hamper innovation.''

He found a possible answer to the puzzle in the work of two management scholars, Carliss Y. Baldwin and Kim B. Clark.  In their book ''Design Rules:  The Power of Modularity'' (MIT Press, 2000), they argued that when there is a lot of technological uncertainty, the fastest way to find the best solution is to permit lots of independent experiments.  That requires modular designs rather than tightly integrated systems.

''By having a lot of modular experimenters, you can take the best, which will be a lot better than the average,'' Professor Rebitzer said.  Employee mobility may encourage productive innovation, as people quickly move to whichever company comes up with the best new technology.

. . .

To Professor Rebitzer's surprise (though not his co-authors'), it turns out that Silicon Valley employees really do move around more often than other people.  The researchers looked at job changes by male college graduates from 1994 to 2001.  During that period, an average of 2.41 percent of respondents changed jobs in any given month.

But, they write, ''living in Silicon Valley increases the rate of employer-to-employer job change by 0.8 percentage point.''

''This effect is both statistically and behaviorally significant -- suggesting employer-to-employer mobility rates are 40 percent higher than the sample average.''

 

For the full commentary, see: 

VIRGINIA POSTREL.  "ECONOMIC SCENE; In Silicon Valley, Job Hopping Contributes to Innovation."  The New York Times  (Thursday, December 1, 2005):  C4.

 

A PDF of the paper by Rebitzer and colleagues is downloadable at:    http://www.federalreserve.gov/Pubs/feds/2005/200511/200511abs.html

 

The book Postrel praises, is:

Source of book image:  http://www.amazon.com/gp/product/customer-reviews/0262024667/104-2835260-2878345?redirect=true



July 5, 2006

Russians Try to Steal Rocker's Vacuum Tube Factory

Mike Matthews holding one of the vacuum tubes produced in the Russian factory he owns.  Source of photo:  online version of the NYT article cited below.

 

(p. C1)  SARATOV, Russia — Mike Matthews, a sound-effects designer and one-time promoter of Jimi Hendrix, bought an unusual Russian factory making vacuum tubes for guitar amplifiers.  Now he has encountered a problem increasingly common here: someone is trying to steal his company.

Sharp-elbowed personalities in Russia's business world are threatening this factory in a case that features accusations of bribery and dark hints of involvement by the agency that used to be the K.G.B.

Though similar to hundreds of such disputes across Russia, this one is resonating around the world, particularly in circles of musicians and fans of high-end audio equipment.

Russia is one of only three countries still making vacuum tubes for use in reproducing music, an aging technology that nonetheless "warms up" the sound of electronic music in audio equipment.

"It's rock 'n' roll versus the mob," Mr. Matthews, 64, said in a telephone interview from New York, where he manages his business distributing the Russian vacuum tubes.  "I will not give in to racketeers."

Yet the hostile takeover under way here is not strictly mob-related.  It is a dispute peculiar to a country where property rights — whether for large oil companies, car dealerships or this midsize factory — seem always open to renegotiation.  It provides a view of the wobbly understanding of ownership that still prevails.

. . .

(p. C4)  If the tube factory dies, so will the future of a rock 'n' roll sound dating back half a century, the rich grumble of a guitar tube amplifier — think of Jimi Hendrix's version of "The Star-Spangled Banner" — that musicians say cannot be replicated with modern technology.

"It's nice and sweet and just pleasing sounding," Peter Stroud, the guitarist for Sheryl Crow, said in a telephone interview from Atlanta.  "It's a smooth, crunchy distortion that just sounds good.  It just feels good to play on a tube amp."

He added:  "It would be a catastrophe for the music industry if something happened to that plant."

 

For the full story, see: 

ANDREW E. KRAMER.  "From Russia, With Dread; American Faces a Truly Hostile Takeover Attempt at His Factory."  The New York Times   (Tuesday, May 16, 2006):  C1 & C4.

 

The transistor disrupted the vacuum tube, a case that would usually be described as an episode of creative destruction.  One secondary lesson from the story above is that there may be a previously unremarked symmetry to the process of disruption.  A disruptive technology typically appeals only to a niche in the market, while the incumbent technology dominates the mainstream.  But after the disruptive technology improves sufficiently to capture much of the mainstream market, maybe there often will remain a niche market that still prefers the older disruptive technology?

To use Danny DeVito's example in "Other People's Money," the car may have disrupted horse-and-buggies.  But for some nostalgic "jobs" the horse-and-buggy may still be the better product, so there will likely remain some demand for buggy whips.

To the extent that this phenomenon is significant, it might serve to ease the labor market transition when one technology leapfrogs another.

 

VacuumTubeBox.jpg A vacuum tube used in guitar amplifiers, that was produced in the factory that Mike Matthews owned.  Source of photo:  online version of the NYT article cited above.




July 4, 2006

Entrepreneur Risks His Money; Government Risks Yours


KaiserGeorgeB.jpg George B. Kaiser.  Source of photo: http://www.forbes.com/finance/lists/10/2003/LIR.jhtml?passListId=10&passYear=2003&passListType=Person&uniqueId=OXNB&datatype=Person

 

(p. A1)  In 2002, Kathleen Eisbrenner, then an executive at El Paso Corp., spent months trying in vain to find a buyer for the company's novel technology for importing natural gas.

In February 2003, she left for a vacation in Cancun, convinced that El Paso would be forced to abandon the project.  As she sat on the beach one afternoon, she got a call on her cellphone.  A colleague had a message from an intermediary, who said he had an "interested buyer," identified only as a "Midwest billionaire."

"It's Warren Buffett calling," she recalls telling her husband as they clinked pina colada glasses together in celebration.  "I was absolutely sure."

But it wasn't Mr. Buffett.  It was another billionaire named George B. Kaiser. 

 . . .

(p. A6)  . . . , Ms. Eisbrenner called Nicolas Saverys, the chief executive of Belgium-based Exmar NV.  Exmar was building two of the new-style LNG vessels.  Ms. Eisbrenner gushed that there was a wealthy buyer.  Mr. Saverys was initially skeptical.  He changed his mind in late February 2003 after meeting Mr. Kaiser in New York.  "At last, I was talking to someone who was putting his own money at stake," he says.

Mr. Saverys sealed the relationship by presenting Mr. Kaiser with a box of pralines from Belgian chocolatier Pierre Marcolini at their second meeting.  Mr. Kaiser, an avowed chocoholic, returned the favor a couple of weeks later in Tulsa, giving Mr. Saverys a box of candy made by Christine Joseph, a Tulsa chocolatier who also was born in Belgium.

Convinced that Energy Bridge could work, Mr. Kaiser agreed to take over the business, closing the deal last December.  El Paso paid him $75 million; in return, he assumed a $120 million obligation to Exmar.  El Paso also agreed to pay to install the underwater pipeline connection that carries the gas from the ship to existing pipelines in the Gulf of Mexico.

The bulk of the $660 million Mr. Kaiser invested went to modify three specially equipped tankers and to charter them for 20 years.  If Energy Bridge opens on time in January, it will be at least two and a half years ahead of any new terminals being developed by other energy companies.  In addition, civic leaders in Massachusetts and Rhode Island, eager to keep LNG terminals and tankers far from the mainland, are encouraging Mr. Kaiser to build an offshore tanker-based project along the Atlantic coast of the U.S.

Mr. Kaiser, who declined requests for an interview but answered some questions by e-mail, concedes he doesn't like "taking a risk on an undemonstrated technology."  But he says that the chance to import natural gas quickly was "such an obvious and alluring business opportunity" that he felt compelled to get Energy Bridge into operation.  He's betting that new LNG-export facilities expected to come online next year in Egypt, Trinidad and Nigeria will create enough extra supply to provide him with ample LNG.

 . . .

He says he acquired Energy Bridge as a challenge.  "I don't gain much pleasure from personal expenditure or recognition," he wrote in an e-mail.  "And any gains I make from the enterprise will accrue to charity.  But I enjoy problem solving and I want to keep my brain active to forestall (or at least diminish) atrophy."

 

For the full story, see:  

Russell Gold.   "Liquid Assets: A Billionaire Takes a Gamble To Fix Natural-Gas Shortage; Mr. Kaiser Plans to Shift Processing Onto Tankers, Avoiding Terrorism Fears; A Deal Sealed With Sweets."  The Wall Street Journal  (Fri., July 23, 2004):   A1 & A6.

(Note: ellipses added.)




June 22, 2006

Precariousness: In France it is Sought and it is Feared

Coombs and VanderHam on the April 3, 2006 extreme ski run, in which they both died.  Source of caption information, and of photo:  online version of the first NYT article cited below.

 

Some seem to seek risk:

(p. A1)  ''La Grave goes from tranquil to frightening and mad, and it's so exhilarating to be in those moods,'' Mrs. Coombs said in a telephone interview last week.  Her husband, she said, ''never found anything more perfect.''

Last month, Mr. Coombs slipped off a cliff and fell 490 feet to his death.  He was 48. He was trying to rescue Chad VanderHam, his 31-year-old protégé and skiing partner from the United States.  Mr. VanderHam had gone over the same cliff moments earlier.  He also died.

Their accident, during a recreational outing, has focused attention on extreme skiing and on this remote destination, high in the Alps about 50 miles east of Grenoble.

For the full story, see:

NATHANIEL VINTON.  "Skiing Beyond Safety's Edge Once Too Often."  The New York Times (Wednesday, May 17, 2006):   A1 & C23.

 

Others seem to fear risk:

PARIS, April 8 - Standing amid the chaos of the protests here this week, Omar Sylla, 22, tried to explain why the French are so angry about what seems to many people like such a small thing: the French government's attempt to loosen labor laws a bit by allowing employers the right to fire young workers without cause during a trial period on the job.

Even after President Jacques Chirac promised to shorten the period to one year from two, the protests continued, and French students and unions have vowed to keep demonstrating until the law is repealed.

''We need less precariousness, not more,'' said Mr. Sylla, the son of immigrants from Ivory Coast, who still lives with his parents in a government-subsidized apartment in a working-class suburb of Paris.

Mr. Sylla said he had searched for years for a job before finding work about a month ago as a baggage handler at Charles de Gaulle International Airport.  Even then, he said, he only got the job because his sister works at the airport and pulled strings on his behalf.

For the full story, see:

CRAIG S. SMITH. "French Unrest Reflects Old Faith in Quasi-Socialist Ideals." The New York Times, Section 1  (Sunday, April 9, 2006):   8.

 

Economists have long puzzled at how the same person can both buy insurance and gamble in a casino.  The first seems an act of risk-aversion, and the second of risk-seeking.  (Milton Friedman, and others, have tried to explain the paradox.)

But I am puzzled by something else.  When risks are taken, why are they so often taken in arenas such as rioting in the streets, or extreme skiing, where they achieve no noble purpose?  Whatever risks one is going to take, why not take them in the arena of innovation and entrepreneurship, where the potential benefits to the innovator and to human progress, are huge?

 




June 20, 2006

Container Ships Revolutionized Shipment of Goods

Source of book image:  http://www.pupress.princeton.edu/titles/8131.html

 

Virginia Postrel's periodic column in the New York Times over the past six years, was a beacon of optimism, clarity and fresh insights on how the economy works.  The excerpt below is from her last column.  Presumably she is moving on to other worthy challenges, but her column in the Times will be missed.

 

''Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world,'' writes Marc Levinson in the new book ''The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger'' (Princeton University Press).

For consumers, this results in lower prices and more variety.  ''People now just take it for granted that they have access to an enormous selection of goods from all over the world,'' Mr. Levinson said in an interview.  That selection, he said, ''was made possible by this technological change.''

. . .  

The idea of containerization was simple:  to move trailer-size loads of goods seamlessly among trucks, trains and ships, without breaking bulk.  But turning that idea into real-life business practice required many additional innovations.

New equipment, from dockside cranes to the containers themselves, had to be developed.  Carriers and shippers had to settle on standard container sizes.  Ports had to strengthen their wharves, create connections to rail lines and highways, build places to store containers and strike new deals with their unions.

Along the way, even the most foresighted people made mistakes and lost millions.  Malcom McLean himself bought fast fuel-guzzling ships right before the 1973 oil crisis and slow, economical ships just as fuel prices turned down.  ''Almost everybody who was concerned with containerization in any way at some point got the story wrong,'' Mr. Levinson said.

It is a classic tale of trial and error, and of creative destruction.

 

For the full commentary, see: 

Virginia Postrel.  "ECONOMIC SCENE; The Container That Changed the World."  The New York Times  (Thursday, March 23, 2006):  C3.

 

The full reference to Levinson's book is:

Levinson, Marc.  The Box:  How the Shipping Container Made the World Smaller and the World Economy Bigger.  Princeton University Press, 2006.

 




June 16, 2006

R. Glenn Hubbard Coins a Phrase: "Nondestructive Creation"

 

In much of the press speculation right before Bush named the replacement for Alan Greenspan as head of the Fed, three names were usually mentioned as frontrunners:  Ben Bernanke, Martin Feldstein, and R. Glenn Hubbard.  Based on various speeches and writings, I had reason to believe that Feldstein and Hubbard understood and appreciated the importance of Schumpeter's process of creative detruction.  So I hoped that Bush would pick either Feldstein or Hubbard.  Alas, I have found no evidence that Bernanke has ever mentioned creative destruction (but maybe I just haven't dug hard enough). 

In the passage below, Hubbard suggests that much job creation, occurs through nondestructive creation, rather than through creative desruction.  An interesting claim, that may be true.  But I doubt it.  Some evidence would be nice.

 

Much of the current policy discussion of the ups and downs of the labor market harkens back to entrepreneurship as "creative destruction."  This conception has fueled policy anxiety over job loss and global competition.  But so much of productivity-enhancing entrepreneurship is really about "nondestructive creation," in which new products and ideas generate growth.

There are policy lessons, too, in the observation that it is not simply opportunity (e.g., IT) but the seizing of opportunity (e.g., new types of firms or business practices) that enhances productivity.  Competition can promote entrepreneurial innovation in a way that raises productivity growth:  Foreign competition has long been a source of productivity-enhancing innovation.  In the domestic economy, policy can enhance or limit competition by its stance toward new business formation and employment. The U.S. has enviably low regulatory costs of business formation, while, by contrast, entry restrictions limit business formation in a number of other competitor countries. Labor market policy matters, too:  Recent OECD research finds a strong negative correlation between a country's technology growth-rate and the strength of its employment protection laws.

. . .

Over the past quarter-century, average U.S. labor productivity has risen by two-thirds.  This enormous increase in workers' ability to produce has not come at the expense of jobs.  The 40 million new jobs created over the same period reveal the secret of an entrepreneurial economy:  Successfully seizing business opportunities can raise living standards and employment.  For this reason, entrepreneurship--the motor that drives the labor market--must be a focus of study in business education and policy making.

 

For the full commentary, see:

R. Glenn Hubbard.  "'Nondestructive Creation'."  The Wall Street Journal  (Wednesday, September 7, 2005):  A16.

 

P.S.  Mark Wohar alerted me to an amusing music video, satarizing Hubbard's possible ambitions to become chair of the Fed.  I later saw the video receive publicity on CNBC's Power Lunch program, where the video's student-creators at the Columbia Business School were feted.  The video may be found at:  http://www0.gsb.columbia.edu/everybreath/

 




June 9, 2006

Leapfrog Competition in Video Game Machines

  Source of book image: http://www.amazon.com/gp/product/customer-reviews/0385479492/ref=cm_cr_dp_2_1/104-0758544-2447945?%5Fencoding=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

 

Co-opetition is a readable book with some plausible discussion of interesting cases.  The central message is that business is not always a zero-sum game (in contrast, say, to competitive sports).  One implication is that the firm's complementary relationships with other firms, may deserve as much attention as its competitive relationships. 

One qualitfication:  I think the book too much emphasizes game theory as the sine qua non source of the book's insights.  About the only game theory you really need to understand 99% of the book's analysis is the concept of the "zero-sum game."

In a couple of places, the book discusses "leapfrog" competiton in the video game industry:

 

(p. 102)   By mid-1995 the price of the 3DO machine was down to $400 (with $150 worth of software thrown in).  Cumulative sales passed half a million.  Progress, surely, but as of early 1996, 3DO's future remains uncertain. It no longer has the 32-bit game to itself.  Sega is shipping its 32-bit Saturn machine at $400.  Sony has launched its 32-bit PlayStation at $300.  Looking to leapfrog them all is Nintendo, whose 64-bit Ultra machine is due out in April 1996 at a price under $250.  

(p. 114)  Could a challenger hope to breach Nintendo's virtuous circle?  Not once the circle had got rolling.  Forget about alternatives--TV,  books, sports.  From a kid's perspective, there were no good alternatives to a video game.  The only real threat came from alternative video game systems.  Here, software was key, as always.  With a huge library of Nintendo titles to choose from, why would anyone buy another machine?  Perhaps a challenger could take successful Nintendo games over to its platform and then offer its own library.  But the exclusivity clause killed that option.  No game could be taken to another platform for a two-year period, by which time the game was passe.  A challenger would have had to start from scratch.  While large profits and shortages normally invite entry, the virtuous circle made competing in Nintendo's game hopeless.  The only hope was to leapfrog Nintendo with a new technology; that's what Sega ultimately did, as we'll see in the Scope chapter.

 

Source: 

Brandenburger, Adam M., and Barry J. Nalebuff.  Co-Opetition;  a Revolution Mindset That Combines Competition and Cooperation; the Game Theory Strategy That's Changing the Game of Business,  1st ed.  Currency, 1996.

 

 




May 28, 2006

Hunter-Gatherers Prefer Civilization

Source of photo:  online version of NYT article cited below.

 

(p. A13) The newly arrived Nukak do not provide much detail about why they left.  They just say that "the Green Nukak," a possible reference to Marxist guerrillas, who wear camouflage, told them to leave.

"The Green Nukak said we could not keep walking in the jungle, or else there would be problems," explained Va-di, another Nukak man, whose words were translated from Nukak by Belisario.  "The Green Nukak told us to go where it is safe."

 . . .

In Aguabonita, the scene on a recent day was full of commotion and laughter.  Naked children tugged at the shirts of two foreign journalists, offering big smiles and hugs.  The men quickly welcomed the visitors into a makeshift shelter, where they laughed at some of the questions and, it seemed, wholly innocently at their own odd predicament.

Are they sad?  "No!" cried a Nukak named Pia-pe, to howls of laughter.  In fact, the Nukak said they could not be happier.  Used to long marches in search of food, they are amazed that strangers would bring them sustenance — free.

What do they like most?  "Pots, pants, shoes, caps," said Mau-ro, a young man who went to a shelter to speak to two visitors.

Ma-be added, "Rice, sugar, oil, flour."  Others said they loved skillets.  Also high on the list were eggs and onions, matches and soap and certain other of life's necessities.

"I like the women very much," Pia-pe said, to raucous laughs.

One young Nukak mother, Bachanede, breast-feeding her infant as she talked, said she was happy just to stay still.  "When you walk in the jungle," she said, "your feet hurt a lot."

The men still go into the jungle, searching for monkeys, a delicacy the Nukak cannot seem to live without.  Monkeys are grilled, dismembered and boiled, then eaten piece by piece.  The women still spend their time carefully weaving intricate wristbands and hammocks, using threads from palm leaves.

All live in shelters now, enjoy constant medical attention and, on weekends, stroll into town to take in the sights.  "Nukak life is hard in the jungle," Dr. Maldonado said.  "You wake up thinking about food and you go hunt, you go search for nuts.  So when they see us they think their food problems are over."

That is not to say the Nukak do not have plans.

Ma-be explained that the idea is to grow plantains and yucca and take the crops to town.  "We can exchange it for money," he said, "and exchange the money for other things."  But first they need to learn how to cultivate crops.  The Nukak say they would like their children to go to school.  They also say they do not want to lose traditions, like hunting or speaking their language.  "We do want to join the white family," Pia-pe said, speaking of Colombian society, "but we do not want to forget words of the Nukak."

 

For the full story, see:

JUAN FORERO.  "Leaving the Wild, and Rather Liking the Change."  The New York Times (Thurs., May 11, 2006):  A1 & A13.

(Note: ellipsis added.)





May 23, 2006

Will Google Leapfrog Microsoft?


 

Microsoft co-founder Bill Gates and Google CEO Eric Schmidt.  Source of photo:  online version of NYT article quoted and cited below.


 

The Microsoft-Google rivalry is shaping up as a titanic corporate clash for the ages.

It may not turn out that way.  Markets and corporate fortunes routinely defy prediction.  But it sure looks as if the two companies are on a collision course, as the realms of desktop computing and Internet services and software overlap more and more.

Microsoft, of course, is the reigning powerhouse of computing and Google is the muscular Internet challenger.  On each side, the battalions are arrayed: executives, engineers, marketers, lawyers and lobbyists. The spending and competition are escalating daily.  For each, it seems, the other passes what Andrew S. Grove, a founder and former chairman of Intel, calls the "silver bullet test" of strategic competition.  "If you had one bullet, who would you shoot with it?"

How the Microsoft-Google confrontation plays out could shape the future of competition in computing and how people use information technology.

Do the pitched corporate battles of the past shed any light on how this one might turn out?

Business historians and management experts say the experience in two of the defining industries of the 20th century, mass-market retailing and automobiles, may well be instructive.  The winners certainly scored higher in the generic virtues of business management:  innovation, execution and leadership.

But perhaps even more significant, those who came out on top, judging from history, had two more specific attributes.  They were the companies, according to business historians, that proved able to adapt to change instead of being prisoners of past success.  And in their glory days, these corporate champions were magnets for the best and brightest people.

 

For the full story, see:

STEVE LOHR.  "And in This Corner . . . Microsoft and Google Grapple for Supremacy as Stakes Escalate."  The New York Times  (Weds., May 10, 2006):  C1 & C14.



  Source of graphic:  online version of NYT article quoted and cited above.





May 22, 2006

Static Versus Dynamic Pictures

Schumpeter distinguished the static picture of capitalism in the textbook model, with the dynamic reality captured in the process of creative destruction.   Apparently Ronald Reagan also understood that a dynamic view is better than a static snapshot.   Michael Deaver recounts:

(p. 75) . . . I told him that I noticed his aversion to sitting for photo shoots.  He looked at me surprised.  "That's funny, in all these years, nobody's ever noticed that."   I asked him to elaborate.  "Well, you can never recover from a still shot."

Reagan was most comfortable with moving film, he went on to say.  He truly believed the television camera was a friend, a device that would separate the real from the phony.  Still cameras could always be used to make a candidate look like a fool.  When he explained this to me in the (p. 76) late 1960s, he said, "You know how I sometimes touch my nose before I make a point?  Well, a still shot would show me picking my nose, while a live shot would show me making my point."

 

Source:

Deaver, Michael K.   A Different Drummer:   My Thirty Years with Ronald Reagan.  Reprint ed.  Harper Paperbacks, 2003.

 




May 21, 2006

Successful Mutual Fund Expert Claims Capitalism is Revitalized by Creative Destruction

SAN FRANCISCO -- One morning in November 2003, 15 Dodge & Cox senior managers gathered in a conference room here to decide an issue brewing for years: Was it time to close the flagship Dodge & Cox Stock Fund to new investors?

For months, senior managers had stood in the hallways and gathered in glass-paned offices, questioning what long had been a point of pride in the mutual-fund world: huge sums of money pouring in for investment.  It became "a water-cooler kind of issue," recalls Kenneth Olivier, the firm's president.

. . .

Dodge also faces some other issues:  In December, longtime Chief Investment Officer John Gunn became chief executive, and a new president and executive vice president were named.  Another CEO switch could occur when Mr. Gunn turns 65 in 2008.  That would be a relatively large amount of turnover for a firm that has had only five CEOs in its history.

. . .

. . . , Mr. Gunn often speaks at mutual-fund forums and investor conferences.  The ruffled-hair Mr. Gunn resembles a college professor, wearing gray pants with yellow pinstripes, a light orange shirt and a yellow tie with zebras one recent day.  His feet on a chair, he quoted 20th century Austrian economist Joseph Schumpeter when talking about media stocks, noting "capitalism is revitalized by waves of creative destruction."  Ancient Asian artifacts, like a pink stone statue from a 14th-century tomb, adorn the office.

As for the flagship fund's future, Mr. Pohl said as he and Mr. Gunn sat at a conference-room table,  "the fact that we have outperformed" since closing to new investors, "I think is proof" that the decision was made at the right time.

"So far," Mr. Gunn added, half-jokingly.

 

For the full story, see:

DIYA GULLAPALLI.   "When Mutual Funds Don't Want Your Cash Dodge & Cox Says No To Many New Customers; Angst at the Water Cooler."   The Wall Street Journal  (Mon., May 1, 2006):   R1 & R?.

(Note: ellipses added.)


 

 

Source of graphic:  online version of WSJ article cited above.





May 20, 2006

Charles Koch Participates in Schumpeter's Process of Creative Destruction

 

KochClharles.gif Charles Koch.  Source of image:  online version of WSJ article cited below.

 

I heard Charles Koch speak at the April 2005 Orlando meetings of the Association of Private Enterprise Education.  Part of his speech involved how he has tried to apply in his own business, Schumpeter's process of creative destruction.  For a long time Koch has been a stalwart defender of the free market in word and deed.

Ideas seem to exhilarate him.  This no doubt explains in part why this professorial CEO delivers "dozens and dozens" of lectures around the country to his employees on these very topics.  But what does any of this have to do with explaining his company's prodigious profitability?  Well, everything -- he believes.  Mr. Koch contends that the key insight of his business career was melding these philosophical insights about the way the wealth-creation process works into a business operating system called "Market Based Management."  This system, which he has trademarked, enables every division of his business empire to operate as a separate, autonomous, profit-maximizing unit.  It is intended to reward employees who think like entrepreneurs.

"Long-term success entails constantly discovering new ways to create value for customers and building new capabilities to capture new opportunities," he instructs.  "In this sense, maintaining a business is, in reality, liquidating a business."  Mr. Koch likens the cycle to Schumpeter's "creative destruction" -- where the old and inefficient are ruthlessly swept away by the new.

 

For the full commentary, see: 

STEPHEN MOORE. "THE WEEKEND INTERVIEW with Charles Koch; Private Enterprise." The Wall Street Journal (Sat., May 6, 2006): A8.

 




May 15, 2006

Benjamin Rogge in 1973 Discussed Leapfrog Competition


Ben Rogge and the members of Wabash College's John Van Sickle Club in 1973.  Source of image: The Wabash 1973 Yearbook, p. 173.

 

In explaining Schumpeter's concept of competition within the process of creative destruction, I have long thought the phrase "leapfrog competition" was apt.  I have no memory of Schumpter himself using the phrase, but did think I remembered Rogge using the phrase.

Today (4/21/06) I used the Amazon.com "Search within the Book" feature to search for the "leapfrog", "leap-frog", and "frog" in Schumpeter's Capitalism, Socialism and Democracy.  No use of any of the three was found.  This provides some support to my belief that Schumpeter himself did not use the phrase.

I also today examined my lecture notes from Benjamin Rogge's Comparative Economic Systems course at Wabash College.  In the midst of a discussion of creative destruction on 1/25/73, I note "leap-frogging analogy" which supports my memory that Rogge made use of the phrase "leapfrog competition" in class.

In terms of in-print uses of the analogy, I have performed the same three searches using Liberty Fund's HTML version of Rogge's Can Capitalism Survive?  I found one "hit" which appears on p. 22 of the print versions of the book.  

The technical description of the market structure, in the language of the textbook model, would be that of “oligopoly”—the rule of the few.

All of this Schumpeter would label as nonsense. Why? Because the investigator would be examining “each year—taken separately” rather than the never-ending game of leapfrog that the data reveal and that represents the true nature of the competitive process.

I will be in the debt of anyone who can show me an earlier use of the word "leapfrog" in the context of a discussion of competiton in Schumpeter's process of creative destruction.





May 10, 2006

Google Evolves

Gary Hamel has recently penned some thoughtful observations about what practices of Google have led to its success.  An excerpt from that analysis appears below.  (Hamel earlier wrote a popular book in which he makes extensive use of Schumpeter's process of creative destruction.)

Only time will tell whether Google has succeeded in building an evolutionary advantage.  But consider:  Since it's founding, it has repeatedly morphed its business model.  Google 1.0 was a search engine that crawled the Web but generated little revenue; which led to Google 2.0, a company that sold its search capacity to AOL/Netscape, Yahoo and other major portals; which gave way to Google 3.0, an Internet contrarian that rejected banner ads and instead sold simple text ads linked to search results; which spawned Google 4.0, an increasingly global entity that found a way to insert relevant ads into any and all Web content, dramatically enlarging the online ad business; which mutated into Google 5.0, an innovation factory that produces a torrent of new Web-based services, including Gmail, Google Desktop, and Google Base.  More than likely, 6.0 is around the corner.

Of course Google may ultimately fall victim to hubris and imperial overstretch as it takes on Microsoft, Yahoo, eBay, the occasional telecom giant and pretty much everyone else in cyberspace.  Or like Microsoft, it may simply become like every other big company as it grows.  But that's not the way I'd bet.  Google seems to have grasped the new century's most important business lesson:  The capacity to evolve is the most important advantage of all.

 

For the full commentary, see:

Hamel, Gary.  "Management à la Google."  The Wall Street Journal  (Weds., April 26, 2006):  A16.

 

 

 

And here is the information on Hamel's most recent book:

 

Hamel, Gary. Leading the Revolution: How to Thrive in Turbulent Times by Making Innovation a Way of Life. Revised & Updated ed.  Harvard Business School Press, 2002.

 

 Source of image: http://www.amazon.com/gp/product/B000EPFVBE/sr=8-1/qid=1146333251/ref=pd_bbs_1/104-5668094-9083929?%5Fencoding=UTF8




May 9, 2006

Europe's Antitrust Policies Based on "Pathological Revulsion" to Creative Destruction

One of the EU's findings is that Microsoft uses its desktop dominance to capture the market for Web server software, and now the EU further charges Microsoft with failing to honor its ruling.  So Microsoft's takeover of serverware proceeds apace?  Er, Brussels we have a problem.

At last count,  Apache-Linux had 62% of the market, Windows 25%,  with various others capturing smaller slices.  True, Microsoft saw a nearly five-point increase in market share last quarter thanks to GoDaddy.com shifting its 3.5 million hosted sites from Linux to Windows.  Maybe the EU should subpoena GoDaddy on grounds that for Microsoft to compete successfully for a customer is illegal.

The other pillar of Europe's case is Microsoft's alleged ability to foreclose the market to rival media-playing software.  This week, EU lawyers are trying to swat down the inconvenient fact that, since their ruling, Apple's iTunes and Macromedia's Flash Player have carved out big niches for themselves.  The Apple example is worth inspecting up close.  It demonstrates that people don't buy computers to run software, but to consume information and entertainment "content."  Apple gave them the music they wanted, and its software easily found a home on their computers.

Yet the EU simply rejects the example as irrelevant because it doesn't fit its mental category about what constitutes a "media player."  More than stupid -- this suggests a pathological revulsion against the kind of disorder in which an Apple can come along and upend all the procrustean assumptions of the EU's drearily youthful staff of economists and lawyers.  We're not kidding when we say there's a connection between the Microsoft case and the European 20-somethings who riot in the streets because they'd rather have no job than take a job from which they might fail and be fired.

 

For the full commentary, see: 

HOLMAN W. JENKINS, JR.  "BUSINESS WORLD; The Land (and Antitrust Case) That Time Forgot."  The Wall Street Journal  (Weds., April 26, 2006):  A17.




April 30, 2006

Seeing How Life Has Improved Since the Days of the Cowboys

cowboyPBS.jpg A cowboy on "Texas Ranch House."   Source of image:  the WSJ article cited below.

 

"Texas Ranch House" -- circa 1867 -- is the latest PBS experiment in transporting a group of people back to another era so we can watch them live and struggle the way our ancestors did.  (Part one of eight begins Monday, 8-9 p.m. ET, but check local listings.)  As with past series such as "Colonial House," everything -- clothing, tools, food, housing and all-around deprivation -- is authentic.  Once again, though, stuffing 21st-century mentalities into period costumes and situations is a tough fit. And once again, it's the folks wearing the bodices that chafe the most.

The Western setting is fascinating for two reasons:  What seems familiar from movies and TV takes on fresh significance when there are real people -- not pampered actors -- trying to scratch out an existence on the frontier 24/7, with no plot to guide them.  There is also the fact, as one of the participants points out early on, that many of us exist today only because a forebear actually did make the real journey West and manage to survive there long enough to bear children.  What luck, we are reminded more than once during this series, that those ancestors were so different from contemporary Americans.

. . .

The trouble that threatens to sabotage the entire experiment develops in the widening gap between the cowboys and the Cooke family.  The first time one of the employees disses boss man Mr. Cooke, yelling "Don't let your wife run your life," we react with disgust at the insult.  As one of the women in the household explains to the camera, all the cowboys "are sexist bastards."  Besides, instead of rising early to ride the range in search of mavericks for 10 hours, the cowboys -- mostly young Americans plus one frisky British boarding-school boy playing the part of 19th-century remittance man -- indulge in long naps during the 100-degree days and often wake up in the morning with hangovers after nights of hard drinking.

At some point, though, certain facts begin to sink in:  Mr. Cooke does have management shortcomings and Mrs. Cooke is far more involved in running the business side of the ranch than a frontier wife would have been.  The ladies, in general, don't enjoy the roles or status that historical reality would dictate, and some act out in defiant, liberated ways.  A fatal flaw, if not the only one, for the success of the ranch enterprise.  In 1867, spending days making cornhusk dolls while the house filled with flies and vegetables rotted in the garden wasn't an option for folks who wanted to stay alive.  And, like it or not, keeping the ranch hands happy, as obnoxious as they might be, was more important than maintaining marital bliss.

This being a made-for-television environment, no one perishes, but there are no happy endings here, either.  When one of the Cooke daughters says to the camera, "I feel lost and dazed and hurt," you feel genuinely sorry for her.  At the same time, it's clearer than ever that emotional pampering, navel-gazing and gender warfare are modern luxuries.  Like it or not, if these had been features of daily life in the West 100 years ago, many of the people reading this would never have been born.

 

For the full review, see:

Nancy deWolf  Smith.  "TV REVIEW; The West That Never Was."  The Wall Street Journal  (Fri., April 28, 2006):   W10.




January 25, 2006

The Good Old Days, When Coffee Smelled Like Wet Dogs




We tend to romanticize the country store, and to deride chain stores and name brands. But maybe coffee lovers should think twice.


 

(p. 116, footnote 1) "The air was thick with an all-embracing odor," wrote Gerald Carson in The Old Country Store, "an aroma composed of dry herbs and wet dogs, [of] strong tobacco, green hides and raw humanity."  Bulk roasted coffee absorbed all such smells.

 

Source: 

Pendergrast, Mark. Uncommon Grounds: The History of Coffee and How It Transformed Our World. New York: Basic Books, 2000.

 

(Note: the "of" in brackets in the Carson quote is the word Carson used in his book; Pendergrast mistakenly substitutes the word "or"; I have corrected Pendergrast's mistake.)






November 17, 2005

Massive Firings Get Reported; Massive Hirings Do Not

The media have a tendency to cover massive layoffs and firm failures but rarely mention when firms hire a large number of people or when a surprisingly large number of new firms are being formed in particular months. From an evolutionary point of view, firm bankruptcies are undesirable only if they are not brought about by other firms that provide better products and services. Joseph Schumpeter's (1942) characterization of capitalism as a process of creative destruction underlines the evolutionary view that better economic structures can only be achieved by allowing underperforming entities to be replaced by organizations that can make better use of their resources. (p. 225; italics in original)
Murmann, Johann Peter. Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions, Cambridge Studies in the Emergence of Global Enterprise: Cambridge University Press, 2003.



November 10, 2005

Rioting Caused by Economy Closed to Creative Destruction


FrenchRiots11-2005.jpg Source of photo: WSJ online version of article quoted and cited below.

The French rioters face very high unemployment. French restrictions on the labor market, and the economy more generally, cause the high unemployment. For example, the French make it hard for firms to fire employees, so as a result, firms are more reluctant to hire workers in the first place, resulting in higher unemployment. Although they do not know it, the rioters are rioting because France is closed to creative destruction. The following commentary is on point:

(p. A16) Like other Americans, immigrants often dramatically improve their quality of life and economic prospects by moving out to less dense, faster growing areas. They can also take advantage of more business-friendly government. Perhaps the most extreme case is Houston, a low-cost, low-tax haven where immigrant entrepreneurship has exploded in recent decades. Much of this has taken place in the city itself. Looser regulations and a lack of zoning lower land and rental costs, providing opportunities to build businesses and acquire property.

It is almost inconceivable to see such flowerings of ethnic entrepreneurship in Continental Europe. Economic and regulatory policy plays a central role in stifling enterprise. Heavy-handed central planning tends to make property markets expensive and difficult to penetrate. Add to this an overall regulatory regime that makes it hard for small business to start or expand, and you have a recipe for economic stagnation and social turmoil. What would help France most now would be to stimulate economic growth and lessen onerous regulation. Most critically, this would also open up entrepreneurial and employment opportunity for those now suffering more of a nightmare of closed options than anything resembling a European dream.



For the full commentary, see:

Joel Kotkin. "Our Immigrants, Their Immigrants." The Wall Street Journal (November 8, 2005): A16.




November 5, 2005

Gradualism Doomed to Failure


Perhaps these observations are relevant to the claim by what I call the "left Schumpeterians" (e.g., Tom Friedman) that a substantial labor safety net is necessary for creative destruction to work.

(p. 271) In Warsaw, from 1978 onward, he had directed what became known as "the Balcerowicz group," a long-running study group that was devoted to analyzing the "problems" of socialism and the question of how to reform the Polish economy. It focused on such basic questions as property rights, the proper role of the state in the economy, inflation, and what was increasingly becoming the true hallmark of socialism-shortages. All of this convinced Balcerowicz that "gradualism" was doomed to failure. Unless enough changes were combined and applied rapidly, the necessary "critical mass" would not be reached. Unlike many economists, he also dabbled in social psychology. He was particularly impressed by the theory of cognitive dissonance. As Balcerowicz summed up its significance for economic reform: "People are more likely to change their attitudes and their behavior if they are faced with radical changes in their environment, which they consider irreversible, than if those changes are only gradual."

Source:

Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modern World.. New York: Simon & Schuster, 1998.




October 5, 2005

If Only Caroline Had Read Schumpeter


Innovation is sometimes slowed because innovators do not know that creative destruction will replace old jobs with equally good, or better, new jobs:

In 1834 Walter Hunt of New York City made such a leap in lateral thinking. In his little machine shop down a narrow alley in Abingdon Square, he devised a machine for stitching cloth with two threads from two separate sources, one a needle on a vibrating arm and the other a transverse shuttle fed by an unwinding bobbin.

. . .

Hunt, an altruistic Quaker, never pursued his invention because his 15-year-old daughter, Caroline, recoiled from the thought that it would put seamstresses out of work. (p. 87)



Source:

Evans, Harold. They Made America: Two Centuries of Innovators from the Steam Engine to the Search Engine. New York: Little, Brown and Co., 2004.

(Note: ellipsis added.)




September 5, 2005

Software Industry Exemplifies Creative Destruction

(p. 4)  In our view, Microsoft's dominant share in operating systems evolved legitimately from a free-market competitive process. The PC software industry was legally open and contained many talented players (Sun, Netscape, Novell, Oracle, Apple, IBM), some larger than Microsoft, some smaller. The market process in this industry has always been characterized by intense innovation, rapid growth, sharply falling prices, and bitter rivalry (and occasional cooperation) between rivals. The industry exemplifies Austrian economist Joseph Schumpeter's vision of competition as a process of creative destruction. Microsoft achieved its market position by aggressively innovating and promoting an open, standardized operating system platform . . . 

 

Source: 

Armentano, Dominick T. Antitrust: The Case for Repeal. 2nd ed: Mises, 1999.

 




September 1, 2005

The Impossible Dream?

In Locked in the Cabinet, Robert Reich's amusing allegory about life in Washington, Reich laments that the Democratic Party -- and in particular the labor constituents in the party -- did not support his vision of education and training as a means of enabling the labor force to adapt to and flourish in a time of rapid economic change and dislocation. Instead, they constituted what Reich called the "Save the Jobs Party," which wanted to preserve the industry, the companies and the jobs that exist today.

I think there is a similar phenomenon in antitrust. Antitrust is about process, and a particularly arduous one at that. We are proud that antitrust "protects competition, not competitors". We say that the market has winners and losers and that that is good.

Unfortunately, process is less attractive, in the concrete world in which real disputes arise and real grievances are formed, than is a comforting end-state. And political actors, I fear, are generally more zealous in guarding the latter than in seeking the former.

So, I can imagine constituents and lobbyists and public interest groups demanding the intervention of antitrust authorities to prevent the BA/NYNEX merger, to open up Korea for more car exports, or to restrict the imports of Japanese television sets into the United States. And I can imagine constituents urging that competition authorities in the EC should leave the Boeing/McDonnell Douglas merger alone or that the antitrust agencies here should stop meddling with hospital mergers in Michigan. But it's hard to imagine tens of thousands of people gathered on the Mall, carrying placards with pictures of Joseph Schumpeter, and demanding that the government give them more "creative destruction."

 

Source:

A. DOUGLAS MELAMED. "International Antitrust in an Age of International Deregulation." Address Before George Mason Law Review Symposium: Antitrust in the Global Economy, Washington, D.C., October 10, 1997.

(Note: At the time, Melamed was Principal Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice. Bold emphasis was added by Diamond.)

 




August 29, 2005

The Creative Destruction of New York City


. . . the eyes of the city are focused firmly on its future, not on its history, and as a result, it subscribes to what the economist Joseph Schumpeter has called "creative destruction." New York is constantly remaking and reinventing itself, both in its physical structures and in its population.


From the preface of:

Kenneth Jackson and David Dunbar. Empire City: New York Through the Centuries. New York: Columbia University Press, 2002.

(Note: ellipsis added.)




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