Schumpeter – Page 11 – artdiamondblog.com

More on Creative Destruction in Science Fiction

On April 11, 2007 I posted an entry noting a new science fiction book with the title Creative Destruction. Not having read the book, I wondered aloud whether the book contained any reference to Schumpeter.

Yesterday (4/13/07), I was delighted to receive an email from the author of the book, answering my question. With his permission, I reproduce his email below:

Dr. Diamond,

I noticed your blog entry about Creative Destruction, my computer-themed SF collection. You asked: Does Schumpeter get a mention?

Absolutely. Here are the opening lines of the foreword:

     If the Internet bubble had a patron saint, he was an obscure economist named Joseph Schumpeter.

     Schumpeter owes his posthumous celebrity to two words: creative destruction. In 1942, he wrote of the "… Process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

     "Creative destruction," he said, "is the essential fact about capitalism." Every dotcom, of course, claimed its new technology would sweep out the old in a frenzy of creative destruction. Occasionally — think Yahoo! and Amazon — they were even correct.

The stories in the collection are most definitely science fiction — I have degrees in physics and computer science — but I also have an MBA from the University of Chicago.

Best regards,

– Ed Lerner

(Note: I have changed the format of the email, a little. The ellipsis was in the original.)

Kodak Tries to Survive Creative Destruction

A Kodak digital production printer. Source of photo: online version of the NYT article cited below.

Digital photography replacing film technology is an example of Schumpeter’s process of creative destruction, and maybe also of the gradual growth of a disruptive technology. Leading incumbent firms frequently have trouble prospering, or even surviving, during such a change. Both the Wall Street Journal and the New York Times had articles on the latest news from Kodak. Here is an excerpt from the New York Times version:

On Tuesday, as the Eastman Kodak Company unveiled its long-anticipated consumer inkjet printer in New York, the mood at the company’s Rochester headquarters could not have been more positive.

“People know we are back on the offensive,” said Frank Sklarsky, Kodak’s chief financial officer. “And that’s making them a lot more charged up about coming to work.”

But yesterday, Kodak gave them reason again to feel depressed. The company said it would cut 3,000 more jobs this year, on top of the 25,000 to 27,000 it had already said would be gone by the end of 2007. At that rate, Kodak will end the year with about 30,000 employees, half the number of just three years ago and a fraction of the 145,000 people it employed in 1988, when its brand was synonymous with photography.

Kodak executives insist that the new cuts do not indicate any snags in the continuing struggle to transform itself from a film-based company into a major competitor in digital imagery. And analysts, too, say the cuts are inevitable, and probably healthy.

For the full NYT story, see:

CLAUDIA H. DEUTSCH. "Shrinking Pains at Kodak." The New York Times (Fri., February 9, 2007): C1 & C4.

For the related WSJ story, see:

WILLIAM M. BULKELEY and ANGELA PRUITT. "Kodak Sees More Job Cuts, Higher Restructuring Costs." The Wall Street Journal (Fri., February 9, 2007): B4.

Source of the first and third graphic: the WSJ article cited above. Source of the second graphic: the NYT article cited above.

Jim Collins on How Boeing Leapfrogged McDonnell Douglas

(p. 202) Wisely, through the 1940s, Boeing had stayed away from the commercial sphere, an arena in which McDonnell Douglas had vastly superior abilities in the smaller, propeller-driven planes that composed the commercial fleet. In the early 1950s, however, Boeing saw an opportunity to leapfrog McDonnell Douglas by marrying its experience with large air-(p. 203)craft to its understanding of jet engines.

Source:

Collins, Jim. Good to Great: Why Some Companies Make the Leap. And Others Don’t. New York: HarperCollins Publishers, Inc., 2001.

Middendorf “Studied Under Joseph Schumpeter”

Source of book image: http://basicbooks.com/perseus/book_detail.jsp?isbn=0465045731

William Middendorf was important in the Goldwater campaign for president. Here is a brief excerpt from his recent book about the campaign:

(p. 8) . . ., I became a disciple of the Austrian libertarian school of economics, having studied under Joseph Schumpeter (an odd-man-out at Harvard, later named by the Wall Street Journal as the most important economist of the twentieth century) and Ludwig Von Mises (at New York University). Schumpeter and Von Mises saw entrepreneurship as a major driving force in economic development, considered private property—protected by an independent judiciary—essential to the efficient use of resources, and held that government intereference in market processes was usually counterproductive.

The reference to the book is:

Middendorf, J. William, II. Glorious Disaster: Barry Goldwater’s Presidential Campaign and the Origins of the Conservative Movement. New York: Basic Books, 2006.

Schumpeterian Alan Greenspan Receives Second Richest Book Advance Ever Paid

Why is this man smiling? (Alan Greenspan has reason to grin.) Source of photo: online version of the NYT article cited below.

I believe that the market for economists is imperfectly competitive, since the supply and demand for academics is highly regulated by governmental and quasi-governmental institutions. But it is interesting that the second highest book advance ever paid is going to Alan Greenspan. Greenspan is a practical, eclectic, economist who believes that Schumpeter’s process of creative destruction is important for understanding the workings of a capitalist economy.

(p. C1) Alan Greenspan, the former chairman of the Federal Reserve, has agreed to sell his memoir for an advance of more than $8.5 million, according to people involved in the negotiations, making a deal that appears to give him the second-largest advance ever paid for a nonfiction book.

. . .

(p. C8) Mr. Greenspan’s advance ranks second only to the more than $10 million paid to former President Bill Clinton for his memoir, "My Life," which was published in June 2004. Pope John Paul II received an advance of $8.5 million in 1994 for his book, "Crossing the Threshold of Hope," and Senator Hillary Rodham Clinton received an $8 million advance for her memoir, "Living History," published in 2003.

For the full story, see:

EDWARD WYATT. "Greenspan’s Book Deal Is Said to Be Among the Richest." The New York Times (Weds., March 8, 2006): C1 & C8.

Barney Frank on Schumpeter’s “Great Concept”

Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

Policy-makers are often enthused by the innovation unleashed by Schumpeter’s process of creative destruction, but draw back out of fear of the destruction of jobs. In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear. More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled. The pain is less than usually thought, and the gain is greater.

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don’t care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don’t see that they’re going to be part of the new creation.

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

Schumpeter’s “Sarcastic Remark” on Mathematics in Economics

Erich Schneider had been a student of Schumpeter’s at the University of Bonn in the late 1920s. The following sentences are from his lectures on Schumpeter that he published in German in 1970, and that were were translated into English by W.E. Kuhn and published in that form in 1975.

(p. 41) When, after many years of separation, I saw Schumpeter again at Harvard in the fall of 1949 and heard his lectures on economic theory–which he gave at 2 p.m., as in Bonn–I found him to be exactly the same man as before. On that afternoon he talked about the nature of dynamic analysis and about the role of difference equations in the framework of such an analysis.

To the above passage, Schneider adds footnote 3:

(p. 59) He dropped the sarcastic remark: "There are economists who do not know what a difference equation is; but there are also those who know nothing else."

Schneider, Erich. Joseph A. Schumpeter: Leben Und Werk Eines Grossen Sozialokonomen (Life and Work of a Great Social Scientist). Lincoln, Neb.: University of Nebraska–Lincoln Bureau of Business Research, 1975.

“The Referee Should Not Be Too Quick With His Whistle”

I found the following wise comments while reading a short review of an old book by Edgar Monsanto Queeny, who followed his father as CEO of the Monsanto corporation, and who wrote a book called The Spirit of Enterprise which Schumpeter praised in a letter to Queeny.

(The abbreviation T.N.E.C. stands for the Temporary National Economic Committee, which I believe was an ad hoc congressional committee during part of F.D.R.’s presidency.)

Mr. Queeny does not give us a satisfactory analysis of the T.N.E.C. reports but his observations are always commonsensical and suggestive. What emerges, and what is important, is that the positive Liberal State should not aim at too subtle a plan for freedom. The referee should not be too quick with his whistle nor too ready to order players off the field. The rules of the game may well allow for a little hurly-burly. Economists like Professor Hutt, who are working out the rules of the game of free enterprise, deserve the highest praise. But they should realize that refinement has its price as well as simplicity, and of the two simplicity costs the less.

Shenfield, A. A. "Review of the Spirit of Enterprise by Edgar M. Queeny." Economica 12, no. 48 (November 1945): 264.

The reference to Queeny’s book is:

Queeny, Edgar M. The Spirit of Enterprise. New York: Charles Scribner’s Sons, 1943.

“Forgotten not for lack of importance, but for lack of theoretical frame-works”

A paper by current head of the President’s Council of Economic Advisors, Ed Lazear, is significant for what it says near the end about economists forgetting facts, because the facts do not fit into current theory.

(p. 260) Human capital theory is primarily a supply-side approach that focuses on the characteristics and skills of the individual workers. It pays far less attention to the environments in which workers work. As such, the human capital framework has led researchers to focus on one class of questions, but to ignore others. Specifically, little attention has been paid to the jobs in which workers are employed.

(p. 263) The fact that some jobs and some job characteristics are more likely to lead to promotions than other jobs is not surprising. But the analysis suggests that other ways of thinking about wage determination, namely, through job selection, may have been unduly ignored in the past.

. . .

Researchers have begun to make jobs rather than individuals the unit of analysis. This change of focus can illuminate new issues and provide answers to questions that were once posed and forgotten. The questions were forgotten not for lack of importance, but for lack of theoretical frame-works. The theory is now developed and awaits confirmation in the data.

For the full paper, see:

Lazear, Edward P. "A Jobs-Based Analysis of Labor Markets." American Economic Review 85, no. 2 (May 1995): 260-265.

(Note: elipsis added.)

“Come With Me, If You Want to Live”

Schumpeter famously stated that creative destruction is "the essential fact" about capitalism. Was he right?

To determine what is "the essential fact" you need to first answer the question "essential for what purpose?" If the purpose is "life, liberty, and the pursuit of happiness" then I think you can show that creative detruction is indeed the essential fact about capitalism; in the key sense that with creative destruction you have a form of capitalism that is best able to enhance "live, liberty, and the pursuit of happiness."

The Terminator famously said "Come with me, if you want to live!" ("Terminator 2: Judgment Day," 1991). Life is a choice. You can choose death instead. Most people, most of the time, choose life. But there are examples of choosing death. E.g., Leon Kass, an oft-quoted "expert" on medical ethics issues, is against current efforts to lengthen the human life span:

(p. D4) While an anti-aging pill may be the next big blockbuster, some ethicists believe that the all-out determination to extend life span is veined with arrogance. As appointments with death are postponed, says Dr. Leon R. Kass, former chairman of the President’s Council on Bioethics, human lives may become less engaging, less meaningful, even less beautiful.

“Mortality makes life matter,” Dr. Kass recently wrote. “Immortality is a kind of oblivion — like death itself.”

That man’s time on this planet is limited, and rightfully so, is a cultural belief deeply held by many. But whether an increasing life span affords greater opportunity to find meaning or distracts from the pursuit, the prospect has become too great a temptation to ignore — least of all, for scientists.

“It’s a just big waste of talent and wisdom to have people die in their 60s and 70s,” said Dr. Sinclair of Harvard.

(And there’s the occasional hermit, like the unibomber, who chooses to live a brutish life without electricity and indoor plumbing.) So long as I, Arnold, and our compatriots, are allowed an island somewhere to peacefully pursue life, I do not much care what Leon and his friends do. My argument, and the book I am writing on creative destruction, are not written for Leon. They are written for all those who choose life, liberty, and the pursuit of happiness.

The NYT quote related to Leon Kass’s praise of mortality, is from p. D4 of:

MICHAEL MASON. "One for the Ages: A Prescription That May Extend Life." The New York Times (Tues., October 31, 2006): D1 & D4.