Category: Books

If Only Caroline Had Read Schumpeter

Innovation is sometimes slowed because innovators do not know that creative destruction will replace old jobs with equally good, or better, new jobs:

In 1834 Walter Hunt of New York City made such a leap in lateral thinking. In his little machine shop down a narrow alley in Abingdon Square, he devised a machine for stitching cloth with two threads from two separate sources, one a needle on a vibrating arm and the other a transverse shuttle fed by an unwinding bobbin.
. . .
Hunt, an altruistic Quaker, never pursued his invention because his 15-year-old daughter, Caroline, recoiled from the thought that it would put seamstresses out of work. (p. 87)

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

When People Change


(p. 462) People don’t change when you tell them they should. They change when they tell themselves they must. Or as Johns Hopkins foreign affairs professor Michael Mandelbaum puts it, “People don’t change when you tell them there is a better option. They change when they conclude that they have no other option.”



Source:
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.


Thomas Friedman’s claim here is plausible, but I find it surprising, given his strong push for a worker safety net when the worker loses a job to creative destruction. The safety net Friedman proposes, in this book anyway, is one that does incorporate some incentives to find a job, but sounds like it could be ‘gamed’ to delay the tough decisions that might need to be made. Hayek had some useful observations on this issue way back in his Road to Serfdom.

Taiwan: “Barren Rock in a Typhoon-Laden Sea”

(p. 262) The ideal country in a flat world is the one with no natural resources, because countries with no natural resources tend to dig deep inside themselves. They try to tap the energy, entrepreneurship, creativity, and intelligence of their own people–men and women–rather than drill (p. 263) an oil well. Taiwan is a barren rock in a typhoon-laden sea, with virtually no natural resources–nothing but the energy, ambition, and talent of its own people–and today it has the third-largest financial reserves in the world.

Source:
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.
(Note: italics in original.)

Software Industry Exemplifies Creative Destruction

(p. 4)  In our view, Microsoft’s dominant share in operating systems evolved legitimately from a free-market competitive process. The PC software industry was legally open and contained many talented players (Sun, Netscape, Novell, Oracle, Apple, IBM), some larger than Microsoft, some smaller. The market process in this industry has always been characterized by intense innovation, rapid growth, sharply falling prices, and bitter rivalry (and occasional cooperation) between rivals. The industry exemplifies Austrian economist Joseph Schumpeter’s vision of competition as a process of creative destruction. Microsoft achieved its market position by aggressively innovating and promoting an open, standardized operating system platform . . . 

 

Source: 

Armentano, Dominick T. Antitrust: The Case for Repeal. 2nd ed: Mises, 1999.

 

The Impossible Dream?

In Locked in the Cabinet, Robert Reich’s amusing allegory about life in Washington, Reich laments that the Democratic Party — and in particular the labor constituents in the party — did not support his vision of education and training as a means of enabling the labor force to adapt to and flourish in a time of rapid economic change and dislocation. Instead, they constituted what Reich called the "Save the Jobs Party," which wanted to preserve the industry, the companies and the jobs that exist today.

I think there is a similar phenomenon in antitrust. Antitrust is about process, and a particularly arduous one at that. We are proud that antitrust "protects competition, not competitors". We say that the market has winners and losers and that that is good.

Unfortunately, process is less attractive, in the concrete world in which real disputes arise and real grievances are formed, than is a comforting end-state. And political actors, I fear, are generally more zealous in guarding the latter than in seeking the former.

So, I can imagine constituents and lobbyists and public interest groups demanding the intervention of antitrust authorities to prevent the BA/NYNEX merger, to open up Korea for more car exports, or to restrict the imports of Japanese television sets into the United States. And I can imagine constituents urging that competition authorities in the EC should leave the Boeing/McDonnell Douglas merger alone or that the antitrust agencies here should stop meddling with hospital mergers in Michigan. But it’s hard to imagine tens of thousands of people gathered on the Mall, carrying placards with pictures of Joseph Schumpeter, and demanding that the government give them more "creative destruction."

 

Source:

A. DOUGLAS MELAMED. "International Antitrust in an Age of International Deregulation." Address Before George Mason Law Review Symposium: Antitrust in the Global Economy, Washington, D.C., October 10, 1997.

(Note: At the time, Melamed was Principal Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice. Bold emphasis was added by Diamond.)

 

The Abuse of Power

FateOfAfricaBK.jpg
From a review of a promising book:

Most African countries have been atrociously governed in the past half-century. A lack of institutional checks has allowed an array of incompetent strongmen to rule as they pleased until the money ran out, at which point northern donors often tossed them an extra bundle of cash.
. . .
Kwame Nkrumah, for example, is widely revered. The founding father of independent Ghana, he was also an eloquent advocate of a united Africa. Africans tend to recall him as a man of great personal integrity who strove mightily to drag his country into the industrial age. Mr. Meredith lays out the facts. Nkrumah paid for his grand (and uniformly loss-making) industrial projects by squeezing money out of Ghana’s poorest citizens, the peasants, and by borrowing recklessly. He was utterly clueless about money. When his finance minister told him in 1963 that the national reserves were less than $1.4 million, he “sat in silence for fifteen minutes, then broke down and wept.”
He not only wrecked the Ghanaian economy; he also snuffed out such political freedoms as the country had enjoyed at independence. He had a law passed in 1958 allowing him to jail anyone suspected of subversive intentions. Twelve parliamentarians objected, on the ground that such a power was sure to be abused. Eleven of them were jailed, which rather proved their point.

ROBERT GUEST. “So Badly Misled.” The Wall Street Journal (Weds., August 31, 2005): D10. (A review of: Meredith, Martin. The Fate of Africa. PublicAffairs, 2005.)

The Creative Destruction of New York City

. . . the eyes of the city are focused firmly on its future, not on its history, and as a result, it subscribes to what the economist Joseph Schumpeter has called “creative destruction.” New York is constantly remaking and reinventing itself, both in its physical structures and in its population.

From the preface of:
Kenneth Jackson and David Dunbar. Empire City: New York Through the Centuries. New York: Columbia University Press, 2002.
(Note: ellipsis added.)

Bill Clinton’s Brief Presentation on Schumpeter

(p. 173) We read all the books, but each week a student would lead off the discussion with a ten-minute pesentation about the book of the week. You could do what you wanted with the ten minutes–summarize the book, talk about its central idea, or discuss an aspect of particular interest–but you had to do it in these ten minutes. Sharabi believed that if you couldn’t, you didn’t understand the book, and he strictly enforced the limit. He did make one exception, for a philosophy major, the first person I ever heard use the word “ontological”–for all I knew, it was a medical specialty. He ran on well past the ten-minute limit, and when he finally ran out of gas, Sharabi stared at him with his big, expressive eyes and said, “If I had a gun, I would shoot you.” Ouch. I made my presentation on Joseph Schumpeter’s Capitalism, Socialism, and Democracy. I’m not sure how good it was, but I used simple words and, believe it or not, finished in just over nine minutes.

Source:
Bill Clinton. My Life. Random House Large Print Edition, 2004.

Benjamin Franklin “Stealing God’s Thunder”

From a delightful review of a promising new book:

In Franklin’s day, lightning destroyed homes, barns and livestock, not to mention human beings. To 18th-century Americans, though, it was not merely an occurrence in nature but a form of judgment sent down by a disapproving God. The only way to appease divine wrath — and avoid lightning’s destructive effects — was to pray during thunderstorms or to ring specially “baptized” church bells whose sound might keep the lightning away.
After his kite experiment, Franklin realized that lightning was a form of electricity. He also discovered that electric current would surge through metal and follow its path downward to the ground. In the summer of 1752, he installed the world’s first lightning rods at the Pennsylvania State House and the Pennsylvania Academy. In 1753, he used the pages of “Poor Richard’s Almanack” to make the case for his invention, describing how a pointed iron rod situated atop a tall structure could draw lightning to it, making storms less dangerous. “Poor Richard’s” sold 10,000 copies, earning Franklin instantaneous fame.
But not everyone embraced his claim. By inventing the lightning rod, he was playing God, at least in the view of some of his contemporaries. They saw God’s handiwork in all aspects of life, from the divine-right monarchies that governed men to the storms that crashed overhead. Franklin’s invention, according to Mr. Dray, raised questions “of reason and faith, liberty and tyranny, science and superstition.” The French scientist and clergyman Jean Antoine Nollet was among the most vocal detractors. He contended that it was “as impious to ward off Heaven’s lightnings as for a child to ward off the chastening rod of its father.”
New Englanders, though, started to come around, especially as the authority of their early clergy began to wane in the mid-18th century. They became dubious of the notion that providence controlled nature in every detail. Some people, Mr. Dray notes, “favored the idea that, although God no longer gave daily attention to the world, he had at Creation pre-programmed natural catastrophes to occur throughout time as a way of reminding humanity of its frailty.”
In 1755, humanity seemed frail indeed. A massive earthquake hit Boston, sending tremors from Nova Scotia to South Carolina. An even greater earthquake in Lisbon a few days later killed tens of thousands. A renewed debate erupted over the cause of such destruction. Thomas Prince, a pastor of Boston’s South Church (who believed that he had saved Boston from a French attack in 1746 by calling on God for a sea storm), insisted that lightning rods played a part, sending electricity down into the ground, where it joined the large quantity already there and built up “subterranean tension.” John Winthrop, a professor of science at Harvard, argued that a “kind of undulatory motion” in the Earth, beneath the surface, caused earthquakes and that lightning rods had nothing to do with it. John Adams even joined the fray, siding with Winthrop.
In the end, Prince won in the court of public opinion, though Winthrop’s arguments had the virtue of being true. The use of lightning rods in Boston declined for many years thereafter. Luckily, a technological development in Europe — the increased size of field artillery — led to the acceptance of lightning rods on the Continent. Vaults under churches and other high buildings housed the gunpowder for such war machines. When lightning struck, the results were disastrous. But a lightning rod, it was discovered, kept nature’s spark away. St. Mark’s Basilica in Venice got one in 1766.
. . .
Mr. Dray’s book boasts a delightful secondary theme: the parallels between Franklin’s invention and America’s revolutionaries. Both were using reason to thwart what many perceived to be the natural order of things. Both were battling entrenched superstitions and dogmatic faith. Both were, in a sense, “playing God.”

Rachel DiCarlo. “Books: Block That Bolt.” The Wall Street Journal. (August 16, 2005): D8. (A review of: Philip Dray. Stealing God’s Thunder. Random House, 2005.)

Tenure and the Market as Protectors of Free Thought

Mark Blaug as a young tutor at Queens College in New York, endorsed a student petition protesting the firing of a left-wing tenured professor for having refused to co-operate with the Un-American Activities Committee. Less than a day later, Blaug received a note from the President of Queens College, telling Blaug that his choice was either to resign or be fired. He resigned.
Fortunately, he received a grant from the Social Science Research Council to complete his dissertation, after which, again seeking employment, he obtained a job interview at Yale:

(p. 77) In the course of the interview, I felt impelled to explain how I had lost my previous teaching position at Queens College. I always remember how Fellner cut me off, saying: ‘We don’t want to hear about that. This is a private college and what transpired at a public university a few years ago is of no concern to us.’ I never had a better demonstration of Milton Friedman’s thesis that a free market, by multiplying the number of probable employers, is more likely to secure liberty for the individual than a socialist system in which the state is a monopsonist.

Source:
Blaug, Mark. “Not Only an Economist: Autobiographical Reflections of a Historian of Economic Thought.” In Reflections of Eminent Economists, edited by Michael Szenberg and Lall Ramrattan, 71-94. Cheltenham, UK: Edward Elgar, 2004.