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McCraw on Schumpeter's History of Economic Analysis:

(p. 461) History of Economic Analysis succeeds where much economic writing or our own time fails, having sacrificed the messy humanity of its subject on the alter of mathematical rigor. Above all else, Schumpeter's History is an epic analytical narrative. It is about real human beings, moored in their own time, struggling like characters in a a novel to resolve difficult problems. Sometimes the problems (p. 462) are purely intellectual. Sometimes they are issues of public policy. Often they are both. But what Schumpeter was trying to do---and in fact did---was answer the deceptively simple question he posed in the early pages of his book: to discover "how economists have come to reason as they do."

Source:

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

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"Steven P. Jobs during a conference in June in San Francisco." Source of caption and photo: online version of the NYT article cited below.

Sometimes Schumpeter suggested that in mature capitalism, it would be possible for some aspects of entrepreneurship to be made routine enough to be performed by corporate bureaucracies.

The creative innovations of Steve Jobs, and the stock market reaction to rumors of his ill-health, illustrate that individual entrepreneurs still matter.

(p. B2) During Apple's earnings conference call Monday, Chief Financial Officer Peter Oppenheimer declined to answer an analyst's question about Mr. Jobs's health, calling it "a private matter." Apple's demurral raised new concerns among investors, who have been worried about Mr. Jobs's health since a 2004 bout with pancreatic cancer.

Their fears flared earlier this year, when Mr. Jobs appeared gaunt at a public appearance; the company at the time blamed "a common bug." The fears were stoked anew this week with a report in the New York Post that the CEO is unwell. Now, said one Apple fund investor, "everyone's worried."

Apple shares fell as low as $146.53 earlier Tuesday following the company's lackluster outlook for the current quarter. Some analysts suggested that concerns about Mr. Jobs's health were also weighing on the stock, which closed at $162.02, down $4.27, in 4 p.m. Nasdaq Stock Market trading.

. . .

The dearth of information has led investors to do their own digging over the years. In 2004, one hedge fund hired private investigators to tail Mr. Jobs to hospital appointments in the hopes of figuring out how sick he was, said a portfolio manager at the fund. Eventually, he said, Mr. Jobs "seemed to catch on," and became harder to track.

More recently, hedge-fund managers said Tuesday, fund managers have talked of asking doctors to closely analyze pictures of Mr. Jobs to monitor changes in his physical appearance, and have been talking about once again hiring investigators to find out Mr. Jobs's prognosis.

For the full story, see:
BEN CHARNY and JUSTIN SCHECK. "Worries Over Jobs's Health Weighs on the Stock." The Wall Street Journal (Weds., July 23, 2008): B2.

(Note: ellipses added.)

Another relevant WSJ article is:
breakingviews.com. "GE Deal Is Looking Bright; Abu Dhabi Capital Accord Yields Potential Benefits For Both Participants; Boardroom Health." The Wall Street Journal (Weds., July 23, 2008): C18.

(Note: The online version of the title of this second WSJ article is: "GE's Imagination at Work Challenged at Home, Company Strikes Gusher With Abu Dhabi Linkup." )

The NYT article is:
JOHN MARKOFF. "Talk of Chief's Health Weighs on Apple's Share Price."
The New York Times (Weds., July 23, 2008): C5.

In fairness to Schumpeter, his position on this issue was frequently conflicted, as has been shown and discussed in:

Langlois, Richard N. "Schumpeter and the Obsolescence of the Entrepreneur." Advances in Austrian Economics 6 (2003): 287-302.

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A few lines from an unpublished Schumpeter poem (written September 6, 1941) that McCraw quotes at length:

(p. 400) To live the lives which are our own To manage our affairs That's what the people wanted

Source:

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

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From McCraw's summary of an article entitled "The Function of Entrepreneurs and the Interest of the Worker" that Schumpeter published in 1927 in a labor magazine :

(p. 178) Schumpeter's key point here is one he hammered home many times: it is the insatiable pursuit of success, and of the towering premium it pays, that drives entrepreneurs and their investors to put so much of their time, effort, and money into some new project whose future is completely uncertain. High entrepreneurial returns are essential to generate gains not only for individuals but also for society, through the creation of new jobs.

Source:

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

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McCraw quoting the diary of Schumpeter's former professor, Friedrich von Wieser:

(p. 101) "He is not misled by prevalent sentiment," the professor wrote in his diary. "Schumpeter has courage, an asset which cannot be over-praised."

Source:

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

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From McCraw's discussion of Schumpeter's "legacy":

(p. 500) In the new world of academic economics, neither the Schumpeterian entrepreneur as an individual nor entrepreneurship as a phenomenon attracts much attention. For professors in economics departments at most major universities, particularly in the United States and Britain, a focus on these favorite issues of Schumpeter's has become a quick ticket out of a job. This development arose from a self-generated isolation of academic economics from history, sociology, and the other social sciences. It represented a trend that Schumpeter himself had glimpsed and lamented but that accelerated rapidly during the two generations after his death.

Source:

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

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From McCraw's discussion of Schumpeter's "legacy":

(p. 496) Because of the importance of entrepreneurship, and because Schumpeter wrote about it with such insight and verve, his name will be forever linked to the idea.

Source:

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

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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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Here is McCraw discussing and quoting Schumpeter's notes for the Walgreen Lectures that he was preparing to deliver just before he died.

(p. 475) In notes he prepared in 1949 for the prestigious Walgreen Lectures, Schumpeter headed one entire section "The Personal Element and the Element of Chance: A Principle of Indeterminateness." Here, he wrote that the time had come for economists to face a problem they had long tried to dodge:

the problem of the influence that may be exerted by exceptional individuals, a problem that has hardly ever been treated without the most blatant preconceptions. Without committing ourselves either to hero worship or to its hardly less absurd opposite, we have got to realize that, since the emergence of exceptional indi-(p. 476)viduals does not lend itself to scientific generalization, there is here an element that, together with the element of random occurrences with which it may be amalgamated, seriously limits our ability to forecast the future. That is what is meant here by "a principle of indeterminateness." To put it somewhat differently: social determinism, where it is nonoperational, is a creed like any other and entirely unscientific.

Source:

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

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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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From McCraw's summary of Schumpeter's History of Economic Analysis:

(p. 453) During the mid-nineteenth century, universities were beginning to teach economics, but "the demand for courses and textbooks produced courses and textbooks and not much else. Does this not show that there is something to one of the theses of this book, namely, that need is not the necessary and sufficient condition of analytic advance and that demand for teaching produces teaching and not necessarily scientific achievement?"

Source:

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

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(p. 435) . . . , the British civil service, which Schumpeter had admired ever since his youth in Vienna, had become enamored of their new role in economic planning, encouraged by the Labour government. Civil servants had drifted into "downright bureau-sadism" in their attitude toward business.

Source:

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

(Note: ellipsis added.)

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From McCraw's summary of a brief Schumpeter essay published in 1943 in Seymour Harris' Postwar Economic Problems:

(p. 424) Schumpeter went on to argue that both in the United States and in capitalist countries abroad, a high rate of public spending during the postwar period would likely evolve into total government control of investment.   . . .    Some industries might be nationalized, and if the government "should try to run the nationalized industries according to the principles of business rationality, Guided Capitalism would shade off into State Capitalism, . . . "

. . .

The overall result would likely be "an amphibial state for the calculable future." The amphibial state might well generate frictions among business, labor, and government and would not benefit from the "motive power" of either capitalism or socialism.

Source:

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

(Note: ellipses added.)

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From McCraw writing about Schumpeter:

(pp. 318-319) The New Deal struck him as still another prelude to authoritarianism. He became convinced that Roosevelt's program represented a step toward either fascism or socialism, and in either case potential dictatorship. He wrote a friend that Roosevelt was like a child mindlessly breaking a machine because he didn't understand its design. The president "is going to turn me into a fan of [Ludwig von] Mises," his classmate at the University of Vienna who had become a free-market fundamentalist and an opponent of almost all government intervention.

Source:

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

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(p. 257) Entrenched interests fought tenaciously against mechanization and the factory system. Unlike the Prussian inventor of a ribbon-weaving loom, who was put to death in 1579 by order of the Danzig Municipal authority, "Entrepreneurs were not necessarily strangled," but "they were not infrequently in danger of their lives."

Source:

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

(Note: the phrases in quotation marks are quotations from Schumpeter's Business Cycles book.)

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(p. 225) The longer Schumpeter taught at Harvard, the more he came to resent the bureaucratic routines of academic life that impinged on his research and writing. He especially disliked departmental meetings, and after several years he began to refer to his colleagues as the "fools" (full professors, a play on the German pronunciation of "full") and "asses" (associate and assistant professors). "These committees!" he wrote a friend, "This mentality, that believes that the core of the world is that one committee dines and makes a report for another committee, which in turn dines."

Source:

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

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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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President of the Czech Republic, Vaclav Klaus. Source of photo: online version of the WSJ article quoted and cited below.

In addition to his insights into global warming, Vaclav Klaus is an advocate of the work of Joseph Schumpeter.

(p. A9) Mr. Klaus is . . . interested in the politics of global warming. He has written a book, tentatively titled "Blue, Not Green Planet," published in Czech last year and due out in English translation in the U.S. this May. The main question of the book is in its subtitle: "What is in danger: climate or freedom?"

He likens global-warming alarmism to communism, which he experienced first-hand in Cold War Czechoslovakia, then a Soviet satellite. While the communists argued that we must all sacrifice some freedom in pursuit of "equality," the "warmists," as Mr. Klaus calls them, want us to sacrifice liberty -- especially economic liberty -- to prevent a change in climate. In both cases, in Mr. Klaus's view, the costs of achieving the goal, and the impossibility of truly doing so, argue strongly against paying a price of freedom.

. . .

In Europe, Mr. Klaus has the reputation of a firebrand, if not a loose cannon. This is a president, after all, who calls global warming "alarmism" a "radical political project" based in a form of "Malthusianism" that is itself grounded on a "cynical approach [by] those who themselves are sufficiently well-off."

"It is not about climatology," he insists. "It is about freedom."

For the full article, see:

BRIAN M. CARNEY. "The Weekend Interview with Vaclav Klaus; The Contrarian of Prague." The Wall Street Journal (Sat., March 8, 2008): A9.

(Note: ellipsis added.)

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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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Rosenberg and Birdzell (1986) mention that Marx over-emphasized the centrality of factories to capitalism, because of the prominence of factories in the period of capitalism during Marx's adulthood. They suggest that factories are only one phase, albeit an important one, in the development of capitalism.

And Schumpeter and Rosenberg may have done the same in his believe that large corporate labs would be able to routinize innovative entrepreneurial activity.

One relevant passage:

It is understandable that Marx, writing in 1848, should speak of modern industry as already a century old, for many of the institutions of industry in 1848 were already that old. Yet the greatest advances in the output of the capitalist engine of production, and the greatest changes in its modes of organization, still lay ahead. (1986, p. 184.)

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. (1986, p. 144.)

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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(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 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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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 graphic:  online version of the NYT article quoted and cited below.

Entrepreneurship thrives when government is small, so it puzzles me when the entrepreneurs in Silicon Valley embrace the Democrats, who generally advocate bigger government.

Of course, my Wabash professor Ben Rogge used to point out that there are always cross-currents that go in a different direction from the mainstream. And among the Democrats, there are what used to be called "new Democrats" who appreciate Schumpeter, and entrepreneurship, and dynamism.

Plus, some Democrats are more respectful of personal, lifestyle choices, and in Silicon Valley, that may be what is given the most weight.

Or, more cynically, maybe there's a public choice explanation---that Silicon Valley donates to Democrats as a form of 'insurance,' in the hope that if the Democrats are elected, they will refrain from over-regulating and over-taxing Silicon Valley. (Even more cynically, compare the case of Florida's sugar-subsidy-rich Fanjul brothers, one of whom donated huge bucks to the first Bush, while another donated huge bucks to Bill Clinton.)

(Another factor is that, alas, entrepreneurs often do not pay much attention to what conditions encourage entrepreneurship.)

(p. C4)  In a flip from the primary season for the 2000 presidential election, 60 percent of the contributions so far from people in the technology field here are going to Democrats. The Democratic candidates raised $1.4 million from the industry in the first half of this year, while Republican candidates raised $890,000. That total is up from $1.2 million in the first six months of each of the last two presidential primary races.

For the full story, see: 

LAURIE J. FLYNN.  "In Primary, Tech's Home Is a Magnet." The New York Times  (Fri., August 24, 2007):  C1 & C4.

     "John McCain, with Google’s chief executive, Eric E. Schmidt, was at the company’s campus in May."  Source of caption and photo:  online version of the NYT article quoted and cited above.

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

Clayton Christensen, in a series of books, has highlighted why it is difficult for a successful incumbent to prepare a successor for its own winning product.  The Motorola case below is another example.

Note, though, that Motorola's failure is not the understandable one of failing to prepare what Christensen calls a "disruptive innovation."  If the story below is right, it is a case of the less understandable failure to continue to deliver with what Christensen calls "sustaining innovation."

(p. A1)  A year ago, Motorola Inc. appeared headed for a third straight year of rich profits under Chief Executive Ed Zander, driven by its hit cellphone the Razr. "A lot of you are always asking what is after the Razr," Mr. Zander said in an April 2006 conference call after another quarter of 30%-plus growth. "I say more Razrs."

But behind the scenes, Motorola was working furiously to get a successor phone to market by the second half of 2006, according to people familiar with the matter. When it failed to do so, profit margins on handsets narrowed and the company swung to a loss. Key executives left. And as the stock slid, activist investor Carl Icahn built up a position and began campaigning for a board seat to address what he called Motorola's "operational problems."

Motorola's travails illustrate the risks for a company that rides high with a big consumer hit. Amid its success with the Razr, it fell behind on developing a phone with the next generation of technology. Missing a beat is especially hazardous in cellphones, where it can take two to three years to develop a new line.

. . .

(p. A14)  As the Razr grew hot, some former designers and engineers say Motorola repeated mistakes it had made a decade earlier with another big hit, the compact flip-top phone known as the StarTAC. That phone was a huge seller, but it also was an analog phone, and its popularity blinded the company to an industry shift to digital technology. Similarly, while Motorola was selling countless Razrs, competitors were hard at work on more sophisticated products for 3G networks.

Motorola put engineers and designers who could have been working on new products on the Razr and its derivatives, some former executives say. "All resources went to feeding the beast," says a former Motorola designer. "Suddenly, you created this thing that requires a lot of energy and attention." Other former executives dispute that the focus on the Razr diverted work from other products and contend Motorola was right to ride the still-popular Razr as long as possible.

For the full story, see: 

CHRISTOPHER RHOADS and LI YUAN.  "DROPPED CALL; How Motorola Fell A Giant Step Behind; As It Milked Thin Phone, Rivals Sneaked Ahead On the Next Generation."   The Wall Street Journal  (Fri., April 27, 2007):  A1  & A14. 

(Note:  ellipsis added.)

The most complete source of Christensen's theory and examples is:  

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

  Motorola CEO.  Source of image:  online version of the WSJ article cited above.

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