Economics – Page 164 – artdiamondblog.com

Stagnation Caused by “Depriving Creative Individuals of Financial Power”

(p. 164) The key to growth is quite simple: creative men with money. The cause of stagnation is similarly clear: depriving creative individuals of financial power. To revive the slumping nations of social democracy, the prime need is to reverse the policies of entrepreneurial euthanasia. Individuals must be allowed to accumulate disposable savings and wield them in the economies of the West. The crux is individual, not corporate or collective, wealth.

Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.

System of Capitalism without Capitalists Is Failing in Europe

(p. 164) The reason the system of capitalism without capitalists is failing throughout most of Europe is that it misconceives the essential nature of growth. Poring over huge aggregations of economic data, economists see the rise to wealth as a slow upward climb achieved through the marginal productivity gains of millions of workers, through the slow accumulation of plant and machinery, and through the continued improvement of “human capital” by advances in education, training, and health. But, in fact, all these sources of growth are dwarfed by the role of entrepreneurs launching new companies based on new concepts or technologies. These gains generate the wealth that finances the welfare state, that makes possible the long-term investments in human capital that are often seen as the primary source of growth.

Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.

Do Recessions Sometimes Encourage Creative Destruction?

Source of image: online version of the NYT article quoted and cited below.

(p. B1) The dot-com bust earlier in the decade dragged down high-fliers like Sun Microsystems and America Online but set the stage for a new generation of Web powerhouses like Google and other innovative Internet software companies like Salesforce.com, founded on disrupting the status quo.

The recession of the early 1990s sent I.B.M., then the dominant force in technology, into a five-year tailspin. But it also propelled Microsoft and Compaq, later acquired by Hewlett-Packard, and Dell to the forefront of computing.

Indeed, Silicon Valley may be one of the few places where businesses are still aware of the ideas of Joseph Schumpeter, an Austrian economist who wrote about business cycles during the first half of the last century. He said the lifeblood of capitalism was “creative destruction.” Companies rising and falling would unleash innovation and in (p. B4) the end make the economy stronger.

Recessions “can cause people to think more about the effective use of their assets,” said Craig R. Barrett, the retiring chairman of Intel, who has seen 10 such downturns in his long career. “In the good times, you can get a bit careless or not focused as much on efficiency. In bad times, you’re forced to see if there is a technology” that will help.

So who’s up, who’s down and who’s out this time around? Microsoft’s valuable Windows franchise appears vulnerable after two decades of dominance. Revenue for the company’s Windows operating system fell for the first time in history in the last quarter of 2008. The popularity of Linux, a free operating system installed on many netbooks instead of Windows, forced Microsoft to lower the prices on its operating system to compete.

Intel’s high-power processors are also under assault: revenue tumbled by 23 percent last quarter, marking the steepest decline since 1985.

Meanwhile, more experimental but lower-cost technologies like netbooks, Internet-based software services (called cloud computing) and virtualization, which lets companies run more software on each physical server, are on the rise.

For the full story, see:

BRAD STONE and ASHLEE VANCE. “$200 Laptops Break a Business Model.” The New York Times (Mon., January 25, 2009): B1 & B4.

Most Great Inventors Were Blessed with Leisure Time

(p. 49) With his wife running the household and tending to their four-year-old daughter, Sally, Priestley simply had more time on his hands to explore, invent, and write. Priestley was retracing a pattern that Franklin had originally carved two decades before, when he handed over day-to-day operation of his printing business to his foreman, David Hall, in 1748 and then spent the next three years transforming the science of electricity. Necessity may be the mother of invention, but most of the great inventors were blessed with something else: leisure time.

Source:
Johnson, Steven. The Invention of Air: A Story of Science, Faith, Revolution, and the Birth of America. New York: Riverhead Books, 2008.

GM’s Saturn Shows Problems With Incumbent Firms Disrupting Themselves

“In July 1990, the first Saturn rolled off the Spring Hill, Tenn., assembly line, with Roger Smith of General Motors holding the key.” Source of the caption and the photo: online version of the NYT article quoted and cited below.

Clayton Christensen has shown that incumbent firms find it extremely difficult to adopt disruptive innovations that would leapfrog their current dominant business model. GM’s abandonment of its Saturn experiment would seem to be an apt illustration of the point:

(p. A29) “I’m absolutely convinced that the Saturn way could have worked,” said Michael Bennett, the original U.A.W. leader at Saturn. “But what we had was never embraced or adopted.”

Mr. Bennett, like many others, can point fingers to explain why Saturn fell short of its promise.
Mr. Bennett blamed a lack of interest by G.M. executives who succeeded Roger Smith, who as chief executive in the 1980s committed $5 billion to begin Saturn.
But those who followed him — including John F. Smith Jr., who became chief executive in 1992, and G.M.’s current chief executive, Rick Wagoner, who ran its North American operations in the 1990s — had bigger worries.
They had to lead the company through the financial turbulence at G.M. in the early 1990s. And with managers at G.M.’s other, older brands begging for investment, G.M. executives declared Saturn would have to prove it deserved more support, even though its small cars were accomplishing their main goal of winning buyers from imports.
Despite G.M.’s pledge that Saturn would be run as a separate company, with its own car development and purchasing operations, it was folded into G.M.’s small-car operations in 1994, and its lineup did not receive any new models for the next five years.

For the full story, see:
MICHELINE MAYNARD. “With Saturn, G.M. Failed a Makeover.” The New York Times (Thurs., December 3, 2008): A1 & A29.

Christensen’s fullest complete expression of his views can be found in:
Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

“The final Saturn built at the plant in March 2007.” Source of the caption and the photo: online version of the NYT article quoted and cited above.

Frazer Institute Seeks Better Measures of Policy Variables

George Gilder emphasizes that the importance of entrepreneurship to economic growth has been missed by many economists, in part because of the difficulty of measuring both the inputs of entrepreneurship (e.g., courage, persistence, creativity, etc.) and the outputs of entrepreneurship (e.g., happiness from more challenging work, greater variety of products, etc.).
Unfortunately this is not just an academic problem, because economists’ policy advice is based on their models, and their models focus on what they can measure. If they can’t measure entrepreneurship, then policies to encourage entrepreneurship are neglected.
Now the Frazer Institute, is seeking proposals to improve the measurement of important poorly measured policy-relevant variables. This initiative is in the spirit of the good work that the Frazer Institute has done in correlating measures of economic freedom with measures of economic growth.
I have been asked to publicize this initiative, and am pleased to do so:

Dear Art Diamond,

The Fraser Institute is launching a new contest to identify economic and public policy issues which still require proper measurement in order to facilitate meaningful analysis and public discourse. We hope you can help promote this contest by posting it on your weblog, artdiamondblog.
The Essay Contest for Excellence in the Pursuit of Measurement is an opportunity for the public to comment on an economic or public policy issue that they feel is important and deserves to be properly measured.
A top prize of $1,000 and other cash prizes can be won by identifying a vital issue that is either not being measured, or is being measured inappropriately. Acceptable entry formats include a short 500-600 word essay, or a short one-minute video essay.
Complete details and a promotional flyer are available at: http://www.fraserinstitute.org/programsandinitiatives/measurement_center.htm.
Entry deadline is Friday, May 15th, 2009.
Sponsored by the R.J. Addington Center for the Study of Measurement.

Enquiries may be directed to:
Courtenay Vermeulen
Education Programs Assistant
The Fraser Institute
Direct: 604.714.4533
courtenay.vermeulen@fraserinstitute.org

The Fraser Institute is an independent international research and educational organization with offices in Canada and the United States and active research ties with similar independent organizations in more than 70 countries around the world. Our vision is a free and prosperous world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals.

An important source of Gilder’s views, obliquely referred to in my comments above, is:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.

World Astonished that an American Tradesman Tamed Lightning

(p. 24) Within five years of his speculative note to Collinson, lightning rods had become a common sight on church steeples throughout Europe and America. Franklin’s biographer Carl Van Doren aptly describes the astonishment that greeted these events around the world: “A man in Philadelphia in America, bred a tradesman, remote from the learned world, had hit upon a secret which enabled him, and other men, to catch and tame the lightning, so dread that it was still mythological.”

Source:
Johnson, Steven. The Invention of Air: A Story of Science, Faith, Revolution, and the Birth of America. New York: Riverhead Books, 2008.

The Most Fertile Margins of the Economy Are Always in People’s Minds

(p. 151) The most fertile margins of the economy are always in people’s minds: thoughts and plans and projects yet unborn to business. The future emerges centrifugally and at first invisibly, on the fringes of existing companies and industries. The fastest-growing new firms often arise through defections of restive managers and engineers from large corporations or through the initiatives of (p. 152) immigrants and outcasts beyond the established circles of commerce. All programs that favor established companies, certified borrowers, immobile forms of pay, pensions, and perquisites, institutionally managed savings and wealth, against mobile capital, personal earnings, disposable savings, and small business borrowing, tend to thwart the turbulent, creative, and unpredictable processes of innovation and growth.

Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.

Rhee Offers DC Teachers Higher Pay If They Give Up Tenure

“Michelle Rhee, second from left, with faculty and staff members of Washington schools last month at an awards ceremony.” Source of the caption and photo: online version of the NYT article quoted and cited below.

(p. A1) WASHINGTON — Michelle Rhee, the hard-charging chancellor of the Washington public schools, thinks teacher tenure may be great for adults, those who go into teaching to get summer vacations and great health insurance, for instance. But it hurts children, she says, by making incompetent instructors harder to fire.

So Ms. Rhee has proposed spectacular raises of as much as $40,000, financed by private foundations, for teachers willing to give up tenure.

Policy makers and educators nationwide are watching to see what happens to Ms. Rhee’s bold proposal. The 4,000-member Washington Teachers’ Union has divided over whether to embrace it, with many union members calling tenure a crucial protection against arbitrary firing.
. . .
Ms. Rhee has not proposed abolishing tenure outright. Under her proposal, each teacher would choose between two compensation plans, one called green and the other red. Pay for teachers in the green plan would rise spectacularly, nearly doubling by 2010. But they would need to give up tenure for a year, after which they would need a principal’s recommendation or face dismissal.

For the full story, see:
SAM DILLON. “A School Chief Takes On Tenure, Stirring a Fight.” The New York Times (Thurs., November 13, 2008): A1 & A19.
(Note: ellipsis added.)

The Policy Agenda to Euthanize the Entrepreneur

(p. 151) The agenda is simple: the stealthy and unannounced euthanasia of the entrepreneur. It can be accomplished easily by following two seductive themes of policy: lowering tax and interest costs for large corporations and a few other favored institutions, while shifting the burden increasingly to individuals and families. By reducing corporate taxes, subsidizing corporate loans, sponsoring a wide range of favored borrowers, institutionalizing personal savings, and discreetly allowing taxes to rise on personal income, government can painlessly extinguish the disposable wealth of entrepreneurs.

Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.