Art Diamond – Page 491 – artdiamondblog.com

Rioting Caused by Economy Closed to Creative Destruction

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

The French rioters face very high unemployment. French restrictions on the labor market, and the economy more generally, cause the high unemployment. For example, the French make it hard for firms to fire employees, so as a result, firms are more reluctant to hire workers in the first place, resulting in higher unemployment. Although they do not know it, the rioters are rioting because France is closed to creative destruction. The following commentary is on point:

(p. A16) Like other Americans, immigrants often dramatically improve their quality of life and economic prospects by moving out to less dense, faster growing areas. They can also take advantage of more business-friendly government. Perhaps the most extreme case is Houston, a low-cost, low-tax haven where immigrant entrepreneurship has exploded in recent decades. Much of this has taken place in the city itself. Looser regulations and a lack of zoning lower land and rental costs, providing opportunities to build businesses and acquire property.

It is almost inconceivable to see such flowerings of ethnic entrepreneurship in Continental Europe. Economic and regulatory policy plays a central role in stifling enterprise. Heavy-handed central planning tends to make property markets expensive and difficult to penetrate. Add to this an overall regulatory regime that makes it hard for small business to start or expand, and you have a recipe for economic stagnation and social turmoil. What would help France most now would be to stimulate economic growth and lessen onerous regulation. Most critically, this would also open up entrepreneurial and employment opportunity for those now suffering more of a nightmare of closed options than anything resembling a European dream.

For the full commentary, see:
Joel Kotkin. “Our Immigrants, Their Immigrants.” The Wall Street Journal (November 8, 2005): A16.

Gradualism Doomed to Failure

Perhaps these observations are relevant to the claim by what I call the “left Schumpeterians” (e.g., Tom Friedman) that a substantial labor safety net is necessary for creative destruction to work.

(p. 271) In Warsaw, from 1978 onward, he had directed what became known as “the Balcerowicz group,” a long-running study group that was devoted to analyzing the “problems” of socialism and the question of how to reform the Polish economy. It focused on such basic questions as property rights, the proper role of the state in the economy, inflation, and what was increasingly becoming the true hallmark of socialism-shortages. All of this convinced Balcerowicz that “gradualism” was doomed to failure. Unless enough changes were combined and applied rapidly, the necessary “critical mass” would not be reached. Unlike many economists, he also dabbled in social psychology. He was particularly impressed by the theory of cognitive dissonance. As Balcerowicz summed up its significance for economic reform: “People are more likely to change their attitudes and their behavior if they are faced with radical changes in their environment, which they consider irreversible, than if those changes are only gradual.”

Source:
Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modern World.. New York: Simon & Schuster, 1998.

Milton Friedman on the Fed

David Levy of the Minneapolis Federal Reserve Bank (not to be confused with George Mason’s David Levy), interviewed Milton Friedman for the bank’s The Region publication. Here is a Levy question and Friedman’s answer:

Region: If you were advising the Federal Reserve, what would you say are the unsolved economic problems of the day?
Friedman: One unsolved economic problem of the day is how to get rid of the Federal Reserve.

Levy, David. “Interview with Milton Friedman.” The Region (June 1992); downloaded 10/05/05 online from: http://minneapolisfed.org/pubs/region/92-06/int926.cfm

Nazi Economy Was Not Efficient

A common view of National Socialism is that it was evil, but efficient. A recent book by Richard J. Evans challenges the “efficient” part of the common view. Here is a relevant paragraph from a useful review of Evans’ book:

(p. B5) The Nazi machine, as Mr. Evans describes it, moved forward with a good deal of creaking and squeaking. The economy was no exception. On many fronts, the Nazis managed nothing more than to bring the economy back to the status quo that existed before the Depression. As late as January 1935, one estimate put the number of unemployed at more than four million, and food shortages were still a problem in 1939. Workers put in longer hours simply to stay even.

For the full review, see:
WILLIAM GRIMES. “The Radical Restructuring of a Germany Headed to War.” The New York Times (Weds., October 26, 2005): B8.

The reference to the book is:
Richard J. Evans. The Third Reich in Power: 1933-1939. The Penguin Press, 2005.

British Inventions Taken Up and Exploited in the United States

Source of book image: http://www.mikemilken.com/fincareer.taf?page=they_made_america

Was it a difference in “innovative energies” that mattered, or was it a difference in institutions and incentives?

(p. 11) This crucial difference between invention and innovation was borne in on me on my return to England in 1957. As a young science reporter, I visited the government-funded National Physical Laboratory at Teddington, and they showed where their senior researcher Robert Watson Watt had in 1935 invented the radar system that was to help the Royal Air Force win the battle of Britain. His former colleagues remarked with chagrin on how swiftly this British invention had been taken up and exploited in the United States after 1939, laying the foundation for the great electronics industry. It was the same story with antibiotics, following Alexander Fleming’s 1928 discovery of penicillin; with Maurice Wilkes’s pioneering efforts in developing the first commercial application of the computer at the offices of J. Lyons and Company in 1951 and with the jet engine. All of these British inventions were superseded by the innovative energies of America.

Source:

Evans, Harold. They Made America: Two Centuries of Innovators from the Steam Engine to the Search Engine. New York: Little, Brown and Co., 2004.

Even Medical Experts Can’t Understand Their Medical Bills

Medical paperwork is a world of co-payments and co-insurers, deductibles, exclusions and contracted fees. Nothing is as it seems: patients receive statements that often do not reflect what is actually owed; telephone calls to customer service agents are at best time-consuming and at worst fruitless. The explanations of benefits that insurers send out — known as E.O.B.’s — are filled with unintelligible codes.
The system is so impenetrable that it mystifies even the most knowledgeable.
”I’m the president’s senior adviser on health information technology, and when I get an E.O.B. for my 4-year-old’s care, I can’t figure out what happened, or what I’m supposed to do,” said Dr. David Brailer, National Coordinator for Health Information Technology, whose office is in the Department of Health and Human Services. ”I can’t figure out what care it was related to or who did what.”
Dr. Blackford Middleton, a professor at Harvard Medical School with special training in health services research, said he did not fare much better than Dr. Brailer.
”I understand the words of diagnoses and procedures,” he said. ”But codes? No. Or how things are paid or not paid? I don’t understand that.”
Dr. Brailer said he often used an analogy to describe the current state of medical billing.
”Suppose you walk into a restaurant,” he said, ”and you don’t get a menu, you don’t get any choice of what food you’ll eat, they don’t tell you what it is when they’re serving it to you, they don’t tell you what it’s going to cost.”
”Then, weeks or months later, you get a bill that tells you all the food you ate and the drinks you had, some of which you remember and some you don’t, and although you get the bill, you still can’t figure out what you really owe,” Dr. Brailer said.
Some people make valiant efforts to sort through bills and claims, but end up throwing up their hands; others ignore them, until they are pursued by collection agencies; still others, basically healthy but weary at the prospect of a paperwork fusillade, stop going to the doctor altogether.

KATIE HAFNER. “Treated for Illness, Then Lost in Labyrinth of Bills.” The New York Times (October 13, 2005): A1.

The French Are Not Always Wrong

Editorial page advice from the budget minister of France:

The choice of nuclear power dates back to the end of World War II. With insufficient fossil fuel reserves, our country very early on invested in energy alternatives. The two oil crises of the ’70s convinced us to accelerate the construction of facilities to produce safe and economically profitable nuclear energy. That strategy paid off: In 30 years, France’s energy independence has risen from 30% to 50%. While turning toward nuclear energy might have seemed unusual 60 years ago, I believe that it was an especially visionary choice. The development of nuclear energy enabled us to meet several objectives: energy independence and security of supply, and competitive, stable energy prices. This nuclear option is also an economic and commercial asset for our country, whose capabilities in this cutting-edge area are world-renowned. (p. A20)

JEAN-FRANCOIS COPE. "Energy a la Francaise." The Wall Street Journal (Weds., October 5, 2005): A20.

Just Throwing Money at R&D Does Not Work?

R&Denigma.gif
(Source: downloaded graphic from online version of WSJ see below, p. A13)

Booz Allen Hamilton Inc., a consulting firm, analyzed six years of financial results by 1,000 publicly traded companies responsible for the bulk of R&D spending globally. The firm found the companies that spent proportionately greater sums than their industry peers didn’t enjoy greater revenue gains or better profits.
The finding flies in the face of academic studies and accepted wisdom on the value of corporate research. It also comes as researchers warn that U.S. companies need to increase spending or risk falling behind rivals in China and India, which are rapidly industrializing.
Booz Allen concluded that once a minimum level of research and development spending is achieved, better oversight and culture were more significant factors in determining financial results. The study calculated the percentage of a company’s revenue spent on R&D and compared it with sales growth, gross profit, operating profit, market capitalization and total shareholder result.

McWilliams, Gary. “In R&D, Brains Beat Spending In Boosting Profit.” The Wall Street Journal
(Weds., October 11, 2005): A2 & A13.
Ah, so maybe the entrepreneur or R&D manager, can make a difference after all? (This is not a surprise, if you believe, as I do, that Clayton Christensen is on to something important.) Or, though less interesting, the results might just be due to diminishing returns to R&D.

Greenspan on Creative Destruction

This morning, Alan Greenspan delivered an excellent speech on “Economic Flexibility” at Georgetown before the National Italian American Foundation, Washington, D.C. Here is the part of the speech most directly relevant to the process of creative destruction:

Starting in the 1970s, U.S. Presidents, supported by bipartisan majorities in the Congress, responded to the growing recognition of the distortions created by regulation, by deregulating large segments of the transportation, communications, energy, and financial services industries. The stated purpose of this deregulation was to enhance competition, which had come to be seen as a significant spur to productivity growth and elevated standards of living. Assisting in the dismantling of economic restraints was the persistent, albeit slow, lowering of barriers to cross-border trade and finance.
As a consequence, the United States, then widely seen as a once-great economic power that had lost its way, gradually moved back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, had called “creative destruction”–the continual scrapping of old technologies to make way for the innovative. In that paradigm, standards of living rise because depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled, along with new savings, to finance the production of capital assets that almost always embody cutting-edge technologies. Workers, of necessity, migrate with the capital.
Through this process, wealth is created, incremental step by incremental step, as high levels of productivity associated with innovative technologies displace less-efficient productive capacity. The model presupposes the continuous churning of a flexible competitive economy in which the new displaces the old.
As the 1980s progressed, the success of that strategy confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economy. No specific program encompassed and coordinated initiatives to enhance flexibility, but there was a growing recognition that a market economy could best withstand and recover from shocks when provided maximum flexibility.

The full speech is available at the Federal Reserve web site at: http://www.federalreserve.gov/boarddocs/speeches/2005/20051012/default.htm

“The Positive Side of Global Warming”

The New York Times devoted more than two full pages to the advantages of the melting of the Arctic ice cap. Here is a short excerpt:

(p. A1) By Mr. Broe’s calculations, Churchill could bring in as much as $100 million a year as a port on Arctic shipping lanes shorter by thousands of miles than routes to the south, and traffic would only increase as the retreat of ice in the region clears the way for a longer shipping season.
With major companies and nations large and small adopting similar logic, the Arctic is undergoing nothing less than a great rush for virgin territory and natural resources worth hundreds of billions of dollars. Even before the polar ice began shrinking more each summer, countries were pushing into the frigid Barents Sea, lured by undersea oil and gas fields and emboldened by advances in technology. But now, as thinning ice stands to simplify construction of drilling rigs, exploration is likely to move even farther north.
Last year, scientists found tantalizing hints of oil in seabed samples just 200 miles from the North Pole. All told, one quarter of the world’s undiscovered oil and gas resources lies in the Arctic, according to the United States Geological Survey.
The polar thaw is also starting to unlock other treasures: lucrative shipping routes, perhaps even the storied Northwest Passage; new cruise ship destinations; and important commercial fisheries.
“It’s the positive side of global warming, if there is a positive side,” said Ron Lemieux, the transportation minister of Manitoba, whose provincial government is investing millions in Churchill.

For the full story, see:
CLIFFORD KRAUSS, STEVEN LEE MYERS, ANDREW C. REVKIN and SIMON ROMERO. “As Polar Ice Turns to Water, Dreams of Treasure Abound.” The New York Times (Mon., October 10, 2005): A1, A10-A11.