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(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.)

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(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].

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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.

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"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.)

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

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"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.

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(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.)

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(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.)

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Source 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."

Source of photo: http://www.thejudyroom.com/louis/pictures/judytomlarge.html

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(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.

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

(Note: italics in original.)

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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.)

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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.)

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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.)

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Source 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.)

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(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.

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(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.

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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.)

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

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(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.

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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.

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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.

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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.

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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).

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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.)

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(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.)

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(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.

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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.

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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

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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.

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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.

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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.

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"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.)

"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.

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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.)

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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.

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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.

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"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.

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(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.

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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.

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

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"The ball built to drop on New Year's Eve in Times Square included thousands of light-emitting diodes, or L.E.D.'s." Source of the caption and photo: online version of the NYT article quoted and cited below.

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.

"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.

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"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.)

"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.

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"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 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 Company (Mon., July 28, 2008): C7.

(Note: ellipsis added.)

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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.)

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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.

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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.)

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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.)

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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.

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  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.

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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.)

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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.

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(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.

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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.)

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

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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.

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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.

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.")

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(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.)

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(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.

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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.

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(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.

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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.

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    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. 

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       "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.

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   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.)

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   "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.

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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.)

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   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.

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

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   One of the panels from Ghiberti's restored "Gates of Paradise."  Source of the photo:  online version of the WSJ article cited below.

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.)

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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.

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(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.

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(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.

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   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.

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   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.

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   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.)

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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.)

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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.

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   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.

     Source of the first and third graphic:  the WSJ article cited above.  Source of the second graphic:  the NYT article cited above.

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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.)

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   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.

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   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.

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   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.

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   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.)

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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: