Artisan’s Skills Were Still Required for Kay’s Flying Shuttle

(p. 223) Kay’s flying shuttle made it possible for weavers to produce a wider product, which they called “broadloom,” but doing so was demanding. Weaving requires that the weft threads be under constant tension in order to make certain that each one is precisely the same length as its predecessor; slack is the enemy of a properly woven cloth. Using a flying shuttle to carry weft threads through the warp made it possible to weave a far wider bolt of cloth, but the required momentum introduced the possibility of a rebound, and thereby a slack thread. Kay’s invention still needed a skilled artisan to catch the shuttle and so avoid even the slightest bit of bounce when it was thrown across the loom.

Source:
Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.

Government “Gave People the Crazy Juice”

BoettkePete2010-12-19.jpg “Peter J. Boettke of George Mason University is the emerging standardbearer for a revived Austrian school of economics.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. B1) Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls “dress Crocs,” hardly seems like the type to lead a revolution.

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people’s ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.
To these free-market economists, government intrusion ultimately sows the seeds of the next crisis. It hampers what one famous Austrian, Joseph Schumpeter, called the process of “creative destruction.”
. . .
(p. B3) It wasn’t a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership “gave people the crazy juice,” he says.

For the full story, see:
KELLY EVANS. “Spreading Hayek, Spurning Keynes; Professor Leads an Austrian Revival.” The Wall Street Journal (Sat., AUGUST 28, 2010): B1 & B3.
(Note: ellipsis added.)

Capitalism’s Market Entrepreneurs Benefit the Common Man

VanderbiltFiskCartoon2010-11-14.jpg“Rails to riches: An 1870 cartoon depicting James Fisk’s attempt to stop Cornelius Vanderbilt from gaining control of the Erie Railroad Company.” Source of caption and cartoon: online version of the WSJ article quoted and cited below.

I have read H.W. Brands’ Masters of Enterprise book and found that it contained some interesting anecdotes, but not very insightful interpretation. From Amity Shlaes’ useful review quoted below, I would expect the same from Brands’ most recent book.

(p. C7) Mr. Brands laments that capitalism’s triumph in the late 19th century created a disparity between the “wealthy class” and the common man that dwarfs any difference of income in our modern distribution tables. But this pitting of capitalism against democracy will not hold. When the word “class” crops up in economic discussions, watch out: it implies a perception of society held in thrall to a static economy of rigid social tiers. Capitalism might indeed preclude democracy if capitalism meant that rich people really were a permanent class, always able to keep the money they amass and collect an ever greater share. But Americans are an unruly bunch and do not stay in their classes. The lesson of the late 19th century is that genuine capitalism is a force of creative destruction, just as Joseph Schumpeter later recognized. Snapshots of rich versus poor cannot capture the more important dynamic, which occurs over time.

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations–and in thoroughly democratic fashion–this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out. If Mr. Brands were right, and the “triumph of capitalism” had deadened democracy and created a permanent overclass, Forbes’s 2010 list of billionaires would today be populated by Rockefellers, Morgans and Carnegies. The main legacy of titans, former or current, is that the innovations they support will produce social benefits, from the steel-making to the Internet.
The second failing of “Colossus” is its perpetuation of the robber-baron myth. Years ago, historian Burton Folsom noted the difference between what he labeled political entrepreneurs and market entrepreneurs. The political entrepreneur tends to compete over finite assets–or even to steal them–and therefore deserves the “robber baron” moniker. An example that Mr. Folsom provided: the ferry magnate Robert Fulton, who operated successfully on the Hudson thanks to a 30-year exclusive concession from the New York state legislature. Russia’s petrocrats nowadays enjoy similar protections. Neither Fulton nor the petrocrats qualify as true capitalists.
Market entrepreneurs, by contrast, vanquish the competition by overtaking it. On some days Cornelius Vanderbilt was a political entrepreneur–perhaps when he ruined those traitorous partners, for instance. But most days Vanderbilt typified the market entrepreneur, ruining Fulton’s monopoly in the 1820s with lower fares, the innovative and cost-saving tubular boiler and a splendid advertising logo: “New Jersey Must Be Free.” With market entrepreneurship, a third party also wins: the consumer. Market entrepreneurs are not true robbers, for their ruining serves the common good.

For the full review, see:
AMITY SHLAES. “An Age of Creative Destruction.” The Wall Street Journal (Sat., October 16, 2010): C7.
(Note: the online version of the article is dated October 29 (sic), 2010.)

The book under critical review by Shlaes:
Brands, H.W. American Colossus: The Triumph of Capitalism, 1865-1900. New York: Doubleday, 2010.

The Folsom book rightly praised in passing by Shlaes is:
Folsom, Burton W. The Myth of the Robber Barons. 4th ed: Young America’s Foundation, 2003.

Long and Unknown Incubation Time Sometimes Needed for Innovation

(p. 118) The incubation stage is the most mysterious of the three stages of divergent thinking. Sometimes it appears as if the problem-solving process has stopped altogether.

Incubation is the absolute opposite of the normal business processes of the operating organization. It is often totally unpredictable. But since it is also the heart of the creative process, it creates a dilemma for the business executive who wants to support innovation but has little patience for unfocused activity. In the incubation period, observations stew on the edge of consciousness until something clarifies. As Newton observed, “I keep the subject constantly before me, and wait until the first dawnings open slowly, little by little, into the full and clear light.”

There is no way to plan “enough” incubation time. What, then, can one do to improve the productivity of this period of incubation? One useful tool is what psychologists call “suspending disbelief–suspending judgment on data or observations that seem to make no sense. It allows time for the rearrangement of data, allowing one time to find new images that explain or illustrate how things might work. Suspending disbelief (p.119) is essential to avoiding premature closure on an issue, or entrenchment in existing ideas and approaches. Suspending disbelief helps to improve one’s chances of finding a fresh view of the universe. It is an unnatural act for an operating organization, but an essential trait for an innovative organization.
A second useful tool is to deconstruct the problem so that you can recombine elements of it and gain fresh insight. Sir James Black, Nobel Prize winner for the discovery of histamine antagonists, suggests that one “turn the question around.” Dr. Black prefers an “oblique attack” to a problem rather than a direct one.
One way to change context, Csikszentmihalyi observes, is to position yourself at the intersection of different cultures or disciplines: “where beliefs, lifestyles, and knowledge mingle and allow individuals to see new combinations of ideas with greater ease. In cultures that are uniform and rigid it takes a greater investment of attention to achieve new ways of thinking. In other words, creativity is more likely in places where new ideas require less effort to be perceived.”

Source:
Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

Forecasting Errors Increase in Complex Environments

(p. 54) There is a great deal of evidence that suggests that when people– for example, investors and managers–are taken out of a familiar environment–an environment of continuity–their ability to deal with the future deteriorates rapidly. John Sterman, J. Spencer Standish professor of management and director of the System Dynamics Group of MIT, who has studied the ability of managers to learn over long periods of time, says that in complex environments, the more experience people have the more poorly they perform. Here is a distillation of Sterman’s findings:

• “Even in perfectly functioning markets, modest levels of complexity cause large and systematic deviations from rational behavior.”
• “There is little evidence of adaptation of one’s ‘rules’ as the complexity of the task increases.” When the environment is complex, people seem to revert to simple rules that ignore time delays and feedback, leading to lowered performance.
• Individuals “forecast by averaging past values and extrapolating past trends. [They] actually spend less time making their decisions in the complex markets than in the simple ones.”
• The lowered performance people exhibit as a result of greater com-(p. 55)plexity does not improve with experience. People become “less responsive to critical variables and more vulnerable to forecasting errors–their learning hurts their ability to perform well in the complex conditions.”
• Most individuals do not learn how to improve their performance in complex conditions. In relatively simple conditions–without time delays or feedback–people “dramatically outperform the ‘do nothing’ rule, but in complex situations many people are bested by the ‘do nothing’ rule.” Attempts individuals make to control the system are counterproductive.

Markets that are undergoing rapid or discontinuous change are extremely complex. Economic systems are highly networked and involve substantial feedback. Given Professor Sterman’s findings, it is not surprising that forecasting deteriorates in the face of rapid change.

Source:
Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

Creative Destruction Book Is Useful for Documenting Dynamism of U.S. Firms

CreativeDestructionBK.jpg

Source of book image: http://www.innovation-creative.com/IMAGES/Livres_innovation_2/Foster_&_Kaplan/Foster_&_Kaplan-(US).jpg

The first couple of chapters of Creative Destruction are useful at providing some statistics on the degree of dynamism in U.S. companies over the past century or so.
In the rest of the book the authors present some interesting examples and refer to some useful research, but too often fall into the too-quick and too-easy management fad-advice mode—and Christensen and Raynor make a sound point in claiming that Foster and Kaplan sometimes oversell their main point.
Still there is some thought-provoking material here and there. I will be quoting a couple of the neater insights in the next couple of weeks.

Book discussed:
Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

Scientific Calculators Creatively Destroyed Slide Rules

(p. 120) I’d been a slide rule whiz in high school, so when I saw the calculator, it was just amazing. A slide rule was kind of like a ruler– you had to look at it precisely to read the values. The most accurate number you could get was only three digits long, however, and even that result was always questionable. With a calculator, you could punch in precisely the digits you wanted. You didn’t have to line up a slider. You could type in your numbers exactly, hit a button, and get an answer immediately. You could get that number all the way out to ten digits. For example, the real answer might be 3.158723623. An answer like that was much more precise than anything engineers had ever gotten before.

Well, the HP 35 was the first scientific calculator, and It was the first in history that you could actually hold in your hand. It could calculate sines and cosines and tangents, all the trigonometric and exponential/logarithmic functions engineers use to calculate and to do their jobs. This was 1973, and back then cal-(p. 121)culators–especially handheld calculators–were a very, very big deal.
. . .
There was no doubt in my mind that calculators were going to put slide rules out of business. (In fact, two years later you couldn’t even buy a slide rule. It was extinct.) And now all of a sudden I’d gotten a job helping to design the next generation of these scientific calculators. It was like getting to be a part of history.

Source:
Wozniak, Steve, and Gina Smith. iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It. New York: W. W. Norton & Co., 2006.
(Note: ellipsis added.)

When Life Really Stunk

(p. 51) The situation of the rural town of Marney was one of the most delightful easily to be imagined. In a spreading dale, contiguous to the margin of a dear and lively stream, surrounded by meadows and gardens, and backed by lofty hills, undulating and richly wooded, the traveller (sic) on the opposite heights of the dale would often stop to admire the merry prospect that recalled to him the traditional epithet of his country.

Beautiful illusion! For behind that laughing landscape, penury and disease fed upon the vitals of a miserable population.
The contrast between the interior of the town and its external aspect was as striking as it was full of pain. With the exception of the dull high street, which had the usual characteristics of a small agricultural market town, some sombre mansions, a dingy inn, and a petty bourse, Marney mainly consisted of a variety of narrow and crowded lanes formed by cottages built of rubble, or unhewn stones without cement, (p. 52) and, from age or badness of the material, looking as if they could scarcely hold together. The gaping chinks admitted every blast; the leaning chimneys had lost half their original height; the rotten rafters were evidently misplaced; while in many instances the thatch, yawning in some parts to admit the wind and wet, and in all utterly unfit for its original purpose of giving protection from the weather, looked more like the top of a dunghill than a cottage. Before the doors of these dwellings, and often surrounding them, ran open drains full of animal and vegetable refuse, decomposing into disease, or sometimes in their imperfect course filling foul pits or spreading into stagnant pools, while a concentrated solution of every species of dissolving filth was allowed to soak through, and thoroughly impregnate, the walls and ground adjoining.
These wretched tenements seldom consisted of more than two rooms, in one of which the whole family, however numerous, were obliged to sleep, without distinction of age, or sex, or suffering. With the water streaming down the walls, the light distinguished through the roof, with no hearth even in winter, the virtuous mother in the sacred pangs of childbirth gives forth another victim to our thoughtless civilisation (sic); surrounded by three generations whose inevitable presence is more painful than her suffering in that hour of travail; while the father of her coming child, in another corner of the sordid chamber, lies stricken by that typhus which his contaminating dwelling has breathed into his veins, and for whose next prey is perhaps destined his new-horn child. These swarming walls had neither windows nor doors sufficient to keep out the weather, or admit the sun, or supply the means of ventilation; the humid and putrid roof of thatch exhaling malaria like all other decaying vegetable matter. The dwelling-rooms were neither boarded nor paved; and whether it were that some were situate in low and damp places, occasionally flooded by the river, and usually much below the level of the road; or that the springs, as was often the case, would burst through the mud floor; the ground was at no time better than so much clay, while sometimes you might see little channels cut from the centre under the doorways to carry off the water, the door itself removed from its hinges; a resting-place for infancy in its deluged home. These hovels were in many instances not (p. 53) provided with the commonest conveniences of the rudest police; contiguous to every door might be observed the dungheap on which every kind of filth was accumulated, for the purpose of being disposed of for manure, so that, when the poor man opened his narrow habitation in the hope of refreshing it with the breeze of summer, he was met with a mixture of gases from reeking dunghills.

Source:
Disraeli, Benjamin. Sybil. paperback ed, Oxford World’s Classics. Oxford, UK: Oxford University Press, 2009 [1845].

Maddison Showed Per Capita Income Stagnation from 1000 AD – 1820 AD

MaddisonAngus2010-05-05.gif

Angus Maddison. Source of photo: http://www.ggdc.net/maddison/

I neither met Angus Maddison, nor ever heard him speak, but I have often seen his work praised by those whom I respect.
One example is the praise given to Maddison by Brad DeLong in his wonderful “Cornucopia” essay that documents the benefits from the process of creative destruction.

(p. B10) Professor Maddison, a British-born economic historian with a compulsion for quantification, spent many of his 83 years calculating the size of economies over the last three millenniums. In one study he estimated the size of the world economy in A.D. 1 as about one five-hundredth of what it was in 2008.

He died on April 24 at a hospital in Paris after a long illness, his daughter, Elizabeth Maddison, said.
. . .
In his research, he tried to reconstruct thousands of years’ worth of economic data, most notably in his 2007 book “Contours of the World Economy 1-2030 A.D..” He argued that per capita income around the globe had remained largely stagnant from about 1000 to 1820, after which the world became exponentially richer and life expectancies surged.
. . .
In his archaeological excavation of the economies of other eras, he was “trying to explain why some countries achieved faster growth or higher income levels than others,” he wrote in an autobiographical essay, “Confessions of a Chiffrephile” published in 1994. He wanted to know what some countries did right and what others did wrong, and to figure out how growth influenced culture, and was influenced by it.
Professor Maddison often referred to himself as a “chiffrephile,” or lover of numbers, a term he invented to characterize economists and economic historians like himself who were prone to quantifying the world.
While macroeconomic research in the last few decades was dominated by elegant mathematical models and technical wizardry, his focus on meat-and-potatoes data and cross-country historical comparisons has come back into vogue in recent years, especially in the wake of the financial crisis.

For the full obituary, see:

CATHERINE RAMPELL. “Angus Maddison, 83, Who Quantified Ancient Economies.” The New York Times (Mon., May 3, 2010): B10.

(Note: ellipses added.)
(Note: the online version of the obituary is dated April 30, 2010 and has the title “Angus Maddison, Economic Historian, Dies at 83.”)

The Maddison book mentioned in the obituary is:
Maddison, Angus. Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History. Oxford and New York: Oxford University Press, 2007.

Leapfrog Competition in the Wine Industry

PlasticCork2010-05-04.jpg

“A machine makes Portugal whine.” Source of caption: print version of the WSJ article quoted and cited below. Source of photo: online version of the WSJ article quoted and cited below.

(p. A1) ZEBULON, N.C.–In a nondescript factory in this small, wooded town, 10 giant machines worked around the clock last year to churn out 1.4 billion plastic corks, enough to circle the earth 1.33 times if laid end-to-end.

Unknown to most American wine drinkers, the plant’s owner, Nomacorc LLC, has quietly revolutionized the 400-year-old wine-cork industry. Since the 1600s, wine has been bottled almost exclusively with natural cork, a porous material that literally grows on trees in Portugal, Spain and other Mediterranean lands.
But over the past 10 years, an estimated 20% of the bottle stopper market has been replaced by a new technology–plastic corks that cost between 2 and 20 cents apiece. More than one in 10 full-sized wine bottles sold worldwide now come with a Nomacorc plug, while another 9% or so come from other plastic cork makers. Screw caps took another 11% of the market.
“We infuriated the cork industry,” says Marc Noel, Nomacorc’s chairman.
. . .
The story of how Nomacorc and other stop-(p. A10)per upstarts broke the centuries-old cork monopoly is a lesson in how innovation, timing and hustle combined to exploit an opening in a once airtight market. It shows that any dominant industry can be vulnerable to competition, especially if it grows complacent about its position.

For the full story, see:
TIMOTHY AEPPEL. “Show Stopper: How Plastic Popped the Cork Monopoly.” The Wall Street Journal (Sat., MAY 1, 2010): A1 & A10.
(Note: ellipsis added.)

CorkPieChart2010-05-04.gif

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