February 2010 – Page 3 – artdiamondblog.com

In Creative Destruction, Firms Survive that Have Technological Expertise Useful for New Product

“Collection of Studebaker National Museum, South Bend, Ind.” “Those who disparage buggies as a dead end forget Studebaker switched from carriages to cars.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 4) I spoke recently about buggy whips with Thomas A. Kinney, an assistant professor of history at Bluefield College in Virginia and author of “The Carriage Trade: Making Horse-Drawn Vehicles in America.”

There were 13,000 businesses in the wagon and carriage industry in 1890, Mr. Kinney said. A company survived not by conceiving of itself as being in the “personal transportation” business, but by commanding technological expertise relevant to the automobile, he said. “The people who made the most successful transition were not the carriage makers, but the carriage parts makers,” he said, some of whom are still in business.
One is the giant Timken Company, whose signature products, roller bearings, were first used in wagon wheels in the 1890s. They easily adapted to the automobile because they could be applied “to nearly anything that moved,” Mr. Kinney wrote.
Westfield, Mass., still known as “Whip City,” once had more than 40 businesses that made whips, tools and carriage parts. Today, only Westfield Whip Manufacturing, founded in 1884, remains. Although it produces buggy whips — now called carriage whips — most of its whips and crops, called “bats,” are for equestrian activities like dressage and jumping.
Buggy whips, with their long, rigid handles and flexible end lashes, were created by braiding fiber around a hard core and had no automotive analog.
The carriage makers did, and they tried their best to remake themselves into automakers. But they were expert woodworkers without expertise in precision metalworking, Mr. Kinney said: “Bicycle manufacturers were actually better suited for auto manufacturing than were carriage makers.”
Businesses do die, even big ones. Leslie Hannah, a visiting professor of economic history at the London School of Economics, studied the 100 largest industrial companies in the world between 1912 and 1995. Almost half of them disappeared, “and more than a quarter experienced bankruptcy or a similar close shave with it,” he wrote in “Learning by Doing in Markets, Firms and Countries.”
The standout carriage business that succeeded was the Studebaker Brothers Manufacturing Company, which began as a blacksmith shop in 1852 and had the financial resources to acquire smaller companies that supplied it with the precision metalworking expertise it lacked when it decided to enter the auto business. In 1913, its automobile production was second only to that of Ford Motor.

For the full story, see:
RANDALL STROSS. “Digital Domain; Failing Like a Buggy Whip Maker? Better Check Your Simile.” The New York Times, SundayBusiness Section (Sun., January 10, 2010): 4.
(Note: the online version of the article is dated January 9, 2010.)
(Note: bold added.)

Entrepreneur Kurzweil Brought Sunshine to Stevie Wonder’s Life

(p. 265) On the snowy morning of January 13, 1976, . . . , there was unusual traffic on Rogers Street. Outside the gray one-story buildings with their clouded tilt-out windows, vans from various television channels maneuvered to park. A man from the National Federation of the Blind struggled over a snow bank onto the sidewalk and began tapping earnestly to get his bearings. A dark-haired young man set out on a three-block trek to the nearest vendor of coffee and donuts for the gathering media. In the room at number 68, two engineers poked at a gray box that looked like a mimeograph machine sprouting wires to a Digital Equipment Corporation computer. Several intense young men in their early twenties debated when to begin a demonstration of the device. The short, curly-haired leader of the group, twenty-seven-year-old Raymond Kurzweil, refused to start until the arrival of a reporter from The New York Times.

The event was a press conference announcing the first breakthrough product in the field of artificial intelligence: a reader for the blind. Described as an “omnifont character recognition device” linked to a synthetic voice, the machine could read nearly any kind of book or document laid face down on its glass lens. With a learning faculty that improved the device’s performance as it proceeded through blurred, faded, or otherwise illegible print, the machine solved problems of pattern recognition and synthesis that had long confounded IBM, Xerox, and the Japanese conglomerates, as well as thousands of university researchers.

. . .
(p. 266) Stevie Wonder, the great blind musician, called. He had heard about the device after its appearance on the “Today Show” and it seemed a lifelong dream come true. He headed up to Cambridge to meet with Kurzweil.

. . .
As Kurzweil remembers, “He was very excited about it and wanted (p. 267) one right away, so we actually turned the factory upside down and produced a unit that day. We showed him how to hook it up himself. He left with it practically under his arm. I understand he took it straight to his hotel room, set it up. and read all night.” As Wonder said, the technology has been “a brother and a friend . . . . without question, another sunshine of my life.” Wonder stayed in touch with Kurzweil over the years and would play a key role in conceiving and launching a second major Kurzweil product.

Source:

Gilder, George. Microcosm: The Quantum Revolution in Economics and Technology. Paperback ed. New York: Touchstone, 1990.
(Note: italics in original; all ellipses added except the ellipsis internal to the last paragraph, which was in the original.)

Chinese Economic Crisis Predicted by Investor Who Predicted Enron Collapse

“James Chanos made his hedge fund fortune predicting problems at companies and shorting their stock.” Source of caption and photo: online version of the NYT article quoted and cited below.

Chanos’ views discussed below are plausible and worth taking seriously. Earlier and overlapping worries about the sustainability of China’s boom were expressed in a credible and scary book by David Smick called The World is Curved.
In addition to some of the concerns expressed by Chanos, Smick also emphasizes that China’s restrictions on the internet will dampen the ability of its entrepreneurs to succeed. That view seems prescient given China’s growing attempts to censor the internet and to hack Google.

(p. B1) SHANGHAI — James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.
“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.
. . .
(p. B4) . . . he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.
“In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”
Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.
“The Chinese,” he warned in an interview in November with Politico.com, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”

For the full story, see:
DAVID BARBOZA. “Shorting China: the Man Who Predicted Enron’s Fall Sees a Bigger Collapse Ahead.” The New York Times (Fri., January 8, 2010): B1 & B5.
(Note: the online version of the article has the title “Contrarian Investor Sees Economic Crash in China” and is dated January 7, 2010.)
(Note: ellipses added.)

The reference to the Smick book is:
Smick, David M. The World Is Curved: Hidden Dangers to the Global Economy. New York: Portfolio Hardcover, 2008.

“Now Mr. Chanos is betting against China, and is promoting his view that the China miracle has blinded investors to the risks in that economy.” Source of caption and poster: online version of the NYT article quoted and cited above.

Washington’s Influence Business is “Booming” Though Fewer Register as Lobbyists

(p. A1) WASHINGTON — Ellen Miller, co-founder of the Sunlight Foundation, has spent years arguing for rules to force more disclosure of how lobbyists and private interests shape public policy. Until recently, she herself registered as a lobbyist, too, publicly reporting her role in the group’s advocacy of even more reporting. Not anymore.

In light of strict new regulations imposed by Congress over the last two years, Ms. Miller joined a wave of policy advocates who are choosing not to declare themselves as lobbyists.
“I have never spent much time on Capitol Hill,” Ms. Miller said, explaining that she only supervises those who press lawmakers directly. “I am not lobbying, so why fill out the forms?”
Her frankness makes Ms. Miller a standout among hundreds of others who are making the same decision. Though Washington’s influence business is by all accounts booming, a growing number of its practitioners are taking a similar course to avoid the spotlight of public disclosure.
“All the increasing restrictions on lobbyists are a disincentive to be a lobbyist, and those who think they can deregister are eagerly doing so,” said Jan Baran, a veteran political lawyer who has been fielding questions from clients hoping to escape registration. “It is creating some apparent contradictions.”
. . .
(p. A12) But for all its penalties, the law left the definition of a lobbyist fairly elastic. The criteria included getting paid to lobby, contacting public officials about a client’s interests at least twice in a quarter and working at least 20 percent of the time on lobbying-related activities for the client.
Enforcement is also light. Lobbyists suspected of failing to file receive at least one official letter offering a chance to rectify their status before any legal action is taken.
After the rules changed, private companies and nonprofit groups immediately began to rethink their registration.
The Union of Concerned Scientists, which advocates on arms control, energy policy and environmental issues, had previously registered almost anyone who went to Capitol Hill on its behalf, said Stephen Young, a senior analyst for the group. That changed after the new law.
“We thought: ‘Hmm, this is now not such an easy thing. Let’s see if we are required to do it. We are not? Let’s take them off,’ ” he said. The group terminated the registrations of “virtually all” its former lobbyists, he said.

For the full story, see:

DAVID D. KIRKPATRICK. “Law to Curb Lobbying Sends It Underground.” The New York Times (Mon., JANUARY 18, 2010): A1 & A12.
(Note: the online version of the article is dated January 17, 2010.)
(Note: ellipsis added.)

Economic Freedom Declined in United States in 2009

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

(p. A17) The United States is losing ground to its major competitors in the global marketplace, according to the 2010 Index of Economic Freedom released today by the Heritage Foundation and The Wall Street Journal. This year, of the world’s 20 largest economies, the U.S. suffered the largest drop in overall economic freedom. Its score declined to 78 from 80.7 on the 0 to 100 Index scale.

The U.S. lost ground on many fronts. Scores declined in seven of the 10 categories of economic freedom. Losses were particularly significant in the areas of financial and monetary freedom and property rights. Driving it all were the federal government’s interventionist responses to the financial and economic crises of the last two years, which have included politically influenced regulatory changes, protectionist trade restrictions, massive stimulus spending and bailouts of financial and automotive firms deemed “too big to fail.” These policies have resulted in job losses, discouraged entrepreneurship, and saddled America with unprecedented government deficits.
. . .
The abiding lesson of the last few years is that the battle for liberty requires perpetual vigilance. President Obama professes desire to foster prosperity, environmental protection, poverty reduction and better health care. How ironic, then, that his economic proposals so consistently ignore or even undermine the one system–free enterprise capitalism–that has proven best able to achieve those goals.
Now America’s once high-flying economy is barely crawling forward. Americans deserve better, and they can do better–as soon as they reverse course and start regaining the economic freedom that made America the most prosperous country in the world.

For the full story, see:
TERRY MILLER. “The U.S. Isn’t as Free as It Used to Be; Canada now boasts North America’s freest economy.” The Wall Street Journal (Weds., JANUARY 20, 2010): A17.
(Note: the online version of the article is dated JANUARY 19, 2010.)
(Note: ellipsis added.)

Self-Financing was Key to Chips & Technology’s Survival

At a key juncture, Gordon Campbell’s self-financing was essential to the survival of his Chips & Technology firm. Chips & Technology produced the chip technology that was the foundation of the clones of the IBM AT (286) PCs. And Chips & Technology turned out to be profitable after one year.

(p. 228) Campbell remembered the words of Nolan Bushnell: “You are not a real entrepreneur until you’ve got to meet a payroll from your own bank account.” There was truth in those words. There was a sense in which Gordon Campbell was still real a real entrepreneur.

If you are a real entrepreneurial hero, you do not get your start by rolling out of bed one morning in rumpled pajamas to answer the telephone at Oakmead Plaza and find that it’s the man from Kleiner-Perkins announcing you’ve won the lottery (for spinning out of Intel with Dr. Salsbury and the rest). Real entrepreneurs do not usually become paper millionaires and Ferrari corsairs in a public offering without ever experiencing the warm sensation of a profitable year. Raphael Klein had put up his house to save Xicor; he was an entrepreneur. In the desperate silicon panic of the summer of 1985, Gordy Campbell too was going to join the club.

The venture capitalists were all waiting for Campbell to fail. He had no chance of money from them. But other sources would also be difficult. Campbell had been careful to buy no real assets and channel all his money into intellectual capital. Morris Jones’s Amdahl 470–a powerful mainframe that ran the company’s CAE programs—was a second-hand machine, leased by the month. The rest of their CAD and CAE equipment was either designed by Jones and his team. including two defectors from Silicon Compilers, or it consisted of various IBM workstations. The company’s most valuable asset, beyond its ideas, was a compaction algorithm that Jones had developed from a Bell Labs model. It allowed the scaling down of CMOS technology into difficult non-linear volt warps near 1-micron geometries. Couldn’t mortgage that at a bank.

Campbell could scarcely believe what was happening to him. There was nothing to do but use his own personal money to keep the company afloat. But if the truth be known, his personal funds were running a bit low. It was out of the question, of course, to sell the Ferrari. He could hardly putter forth onto Route 280 and down toward Sand Hill Road like a beggar with some tin cup from Toyota. Campbell’s other wealth, though, was mostly in SEEQ stock that was then selling at $2 per share and going down.

Campbell would have to sell at the very bottom of the market and use his own last personal wealth to finance a company with no revenues and a burn rate of some $4,000 a day. He gasped and did it. He went through a couple of cliff-hanging months, with shortened fin-(p. 229)gernails. But the act of personal sacrifice was catalytic. Within a few weeks, several of the employees and other friends also put up some money, including $200,000 from his financial officer, Gary Martin. Before the year was our he had raised another indispensable $1.5 million from a number of companies in Japan, including Kyocera, Mitsui, Yamaha, and Ascii, Kay Nishi’s PC software firm that represented Chips in Asia. By July, the IBM graphics enhancement chip set was finished and Chips & Technologies was a company almost fully owned and controlled by its employees.

By July 1986, when the chip set for the IBM AT computer was finished, most of the world had decided that the AT would be the next major personal computer standard. In the United States, Tandy, PC’s Limited (now Dell), and several other then unknown manufacturers bought the Chips & Technologies set. Tandy became the leading AT compatible producer, assembling the computers in a factory in Fort Worth manned by immigrants from twenty countries led by an immigrant from Japan. Among the purchasers of the Chips set in Europe were Olivetti, Apricot, Siemens, and Bull. Nishi signed up NEC, Sony, Epson, and Mitsubishi in Japan; Goldstar, Samsung, Daewoo, and Hyundai in Korea; a number of companies in Taiwan; and the Great Wall Computer Company of China. Most of these firms –plus Compaq and a slew of producers of IBM add-in graphics gear–also were buying the graphics enhancement chip set.

At the outset. Campbell had boldly predicted profitability in a year and a half: In fact, the firm was profitable by the last quarter of the first year.

Source:

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

Grumpy Forecaster Bites Pushy Politician

“Will there be six more weeks of winter? Will Chuck mind his manners at the Staten Island Zoo? Will Mayor Michael R. Bloomberg pull this stunt again? The answers are uncertain. It is clear, though, that the mayor can be persistent in the face of hostility.” Source of the caption and the photo: online version of the NYT article quoted and cited below.

(p. A20) There are creatures — hibernating bears come to mind, or emergency-room doctors after an overnight shift — who don’t appreciate being roused from their slumber. Perhaps that’s what irked Chuck the Groundhog on Monday morning on Staten Island when Mayor Michael R. Bloomberg tried to lure him out of his wooden shelter.

Chuck wasn’t up for whatever it was that Mr. Bloomberg had planned for him — or for predicting how much longer winter was going to last, for that matter. And he got so annoyed at the mayor that he bit the mayor’s left hand, his sharp teeth piercing Mr. Bloomberg’s black leather gloves.
One can argue that Mr. Bloomberg sort of asked for it. As cameras rolled and the crowd took in the event — a local imitation of the Punxsutawney Phil tradition — Chuck at first refused to come out. Children chanted his name to no avail. Mr. Bloomberg seemed to realize that the reclusive rodent was spoiling the show.
He tried to lure Chuck out of his cottage with an ear of corn, but Chuck shrewdly grabbed the corn and dragged it inside to enjoy. The mayor tried again, twice, but then, seemingly out of patience, he grabbed Chuck by the belly with both hands before he could hide again and held him up in the air for everyone to see.
By then, the mayor had already been bitten.

For the full story, see:
FERNANDA SANTOS. “Reclusive Staten Islander Bites Mayor.” The New York Times (Tues., February 3, 2009): A20.
(Note: the online version of the article has the slightly different title: “Reclusive Staten Island Groundhog Bites Mayor.”)

Art Diamond Identified as One of “the Country’s Most Prolific and Influential Economics Bloggers”

Source of graph: http://image.exct.net/lib/fef61175736207/m/1/Q9-Report-Card2.gif

The Kauffman Foundation recently invited me to participate in a quarterly survey on economic policy that they are compiling from among bloggers who they have identified as among “the country’s most prolific and influential economics bloggers.” I agreed to participate.
Apparently tomorrow (2/2/10) they will release the results of the first survey.
Below I have quoted most of a press release that they emailed out today.
(The Kauffman Foundation is one of the leading non-profit organizations supporting research on entrepreneurship.)

Top Economics Bloggers Grade U.S. Institutions that Influence Economy in New Kauffman Survey

Watch for complete results tomorrow of the first
‘Kauffman Economic Outlook:
A Quarterly Survey of Leading Economics Bloggers’

The country’s most prolific and influential economics bloggers grade the institutions and organizations that impact the economy in a new Kauffman Foundation survey. On an A to F grading scale, the nation’s top economics bloggers give the highest marks to the Congressional Budget Office (CBO) and General Accountability Office (GAO), as well as to the “U.S. business community.” Central banks such as the Federal Reserve and European Central Bank got passing grades by most, with few A’s and many F’s. Similarly, the World Bank had mixed marks. The worst marks went to Wall Street firms (31 percent F’s) and the U.S. Congress (51 percent F’s).
Learn more about what these insightful analysts think about U.S. economic performance, policy, institutions, and the deficit in the first “Kauffman Economic Outlook: A Quarterly Survey of Economics Bloggers,” which will debut tomorrow, Feb. 2, 2010, at www.kauffman.org.
The survey was conducted in mid-January 2010 by soliciting input from bloggers ranked among the top 200 economics bloggers according to Palgrave’s Econolog.net. Ten core questions and seven topical questions were designed in coordination with a distinguished board of advisors.

Web version of press release:
http://view.exacttarget.com/?j=fe5916727d650c747316&m=fef61175736207&ls=fded1c77726707797712717c&l=fe5815757461007a7c13&s=fe27157476630575771d75&jb=ffcf14&ju=fe2f16767565027b701575